SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  ------------

                                   FORM 10-KSB
        (Mark one)

        [X] Annual report under Section 13 or 15(d) of the  Securities  Exchange
Act of 1934 for the fiscal year ended July 31, 1998
                                       OR

        [ ]  Transition  report  under  Section  13 or 15(d)  of the  Securities
Exchange Act of 1934 for the transition period from -------- to --------

                           COMMISSION FILE NO. 1-13851

                                   SONUS CORP.
                 (Name of small business issuer in its charter)

                       ALBERTA, CANADA              NOT APPLICABLE
               (State or other jurisdiction of     (I.R.S. employer
                incorporation or organization)    identification no.)

              111 S.W. FIFTH AVENUE, SUITE 2390
                       PORTLAND, OREGON                   97204
            (Address of principal executive office)     (Zip code)

                                 (503) 225-9152
                (Issuer's telephone number, including area code)

         Securities registered under Section 12(b) of the Exchange Act:

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           Title of Each Class                  Name of Each Exchange on Which Registered
           -------------------                  -----------------------------------------
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COMMON SHARES, WITHOUT NOMINAL OR PAR VALUE              AMERICAN STOCK EXCHANGE

       Securities registered under Section 12(g) of the Exchange Act: NONE

        Check whether the issuer: (1) has filed all reports required to be filed
by  Section  13 or 15(d)  of the  Securities  Exchange  Act of 1934  during  the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days.  Yes [X]   No [ ]

        Check if there is no disclosure of  delinquent  filers  pursuant to Item
405 of Regulation S-B contained herein, and no disclosure will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

        State  the  issuer's   revenues   for  its  most  recent   fiscal  year:
$22,368,000.

        State the  aggregate  market value of the voting and  non-voting  common
equity held by  non-affiliates  of the registrant,  computed by reference to the
price at which the common equity was sold, or the average bid and asked price of
such common equity, as of October 1, 1998: $37,100,723

        State the number of shares  outstanding of each of the issuer's  classes
of common equity: Common Shares, without nominal or par value, 6,119,707 shares,
as of October 1, 1998.

        Transitional Small Business Disclosure.  Format:  Yes----    No   X    

                      DOCUMENTS INCORPORATED BY REFERENCE:

        Portions of the issuer's definitive Management  Information Circular and
Proxy Statement dated November 12, 1998, are incorporated by reference into Part
III of this Form 10-KSB.

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                                          TABLE OF CONTENTS
                                                                                             PAGE
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PART I  .......................................................................................3

ITEM 1. Description of Business................................................................3

ITEM 2. Description of Property................................................................8

ITEM 3. Legal Proceedings......................................................................9

ITEM 4. Submission of Matters to a Vote of Security Holders....................................9

PART II ......................................................................................10

ITEM 5. Market for Common Equity and Related Stockholder Matters..............................10

ITEM 6. Management's Discussion and Analysis or Plan of Operation.............................13

ITEM 7. Financial Statements..................................................................18

ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..18

PART III......................................................................................19

ITEM 9. Directors, Executive Officers, Promoters, and Control Persons; Compliance
        with Section 16(a) of the Exchange Act................................................19

ITEM 10.Executive Compensation................................................................20

ITEM 11.Security Ownership of Certain Beneficial Owners and Management........................20

ITEM 12.Certain Relationships and Related Transactions........................................20

ITEM 13. Exhibits and Reports on Form 8-K.....................................................20
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                                      -i-
<PAGE>
FORWARD-LOOKING STATEMENTS

Statements  in this report,  to the extent that they are not based on historical
events,  constitute  forward-looking   statements.   Forward-looking  statements
include,  without  limitation,   statements  containing  the  words  "believes,"
"anticipates,"  "intends," "expects," and words of similar import. Investors are
cautioned  that  forward-looking  statements  involve  known and unknown  risks,
uncertainties and other factors that may cause the actual results,  performance,
or achievements  of Sonus Corp. (the "Company") to be materially  different from
those described herein. Factors that may result in such variance, in addition to
those accompanying the  forward-looking  statements,  include economic trends in
the Company's  market areas, the ability of the Company to manage its growth and
integrate new acquisitions into its network of hearing care clinics, development
of new or  improved  medical  or  surgical  treatments  for  hearing  loss or of
technological  advances in hearing  instruments,  changes in the  application or
interpretation of applicable government laws and regulations, the ability of the
Company to complete  additional  acquisitions  of hearing  care clinics on terms
favorable  to the  Company,  the degree of  consolidation  in the  hearing  care
industry,   the  Company's   success  in  attracting  and  retaining   qualified
audiologists  and  staff to  operate  its  hearing  care  clinics,  product  and
professional  liability  claims  brought  against  the  Company  that exceed its
insurance coverage,  and the availability of and costs associated with potential
sources of financing.  The Company  disclaims any  obligation to update any such
factors  or to  publicly  announce  the  result of any  revisions  to any of the
forward-looking   statements  contained  herein  to  reflect  future  events  or
developments

                                      -2-
<PAGE>
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

OVERVIEW

The Company was incorporated under the laws of the Province of Alberta,  Canada,
in July 1993,  under the name "575035 Alberta Ltd." The Company changed its name
to HealthCare  Capital Corp. in October 1994, when it acquired nine hearing care
clinics in British  Columbia.  The Company did not begin operating in the United
States until it purchased two hearing care clinics near Santa Maria, California,
in July 1996.  By vote of the  shareholders,  the Company  changed its name from
HealthCare  Capital  Corp.  to Sonus Corp.  on February  9, 1998.  The  Company,
through its subsidiaries Sonus-USA,  Inc.  ("Sonus-USA"),  and Sonus-Canada Ltd.
("Sonus-Canada"),  currently  owns and  operates a network  of 89  hearing  care
clinics in the United  States and Western  Canada.  Clinics owned by the Company
are located in the states of Arizona, California,  Illinois, Michigan, Missouri,
New Mexico,  North Dakota,  Oregon, and Washington and in the Canadian provinces
of British  Columbia and Alberta.  The Company  intends to expand its network of
hearing  care  clinics  by  acquiring  clinics  in its  existing  as well as new
geographic markets.

Each of the  Company's  hearing  care  clinics  provides  its  hearing  impaired
patients with a full range of  audiological  products and  services.  During the
fiscal year ended July 31, 1998,  approximately  84% of the  Company's  revenues
were derived from product sales, including hearing instruments,  batteries,  and
accessories,  while 15% of the Company's revenues were derived from audiological
services. Substantially all of the Company's hearing care clinics are staffed by
audiologists.  The Company's operating strategy is to provide patients with high
quality and  cost-effective  hearing care while at the same time  increasing its
operating margins by attracting and retaining patients, recruiting qualified and
productive  audiologists,   achieving  economies  of  scale  and  administrative
efficiencies,  and pursuing large group and managed care contracts.  The Company
believes that it is well  positioned to provide  retail  hearing  rehabilitative
services to  consumers  while  simultaneously  serving the  diagnostic  needs of
referring  physicians  and meeting the access and cost  concerns of managed care
providers and insurance companies.

The Company, through its recently acquired subsidiary Hear PO Corp., operates as
an independent provider association and hearing care benefit administrator. Hear
PO Corp.  obtains  contracts to provide  hearing  care  benefits to managed care
group and corporate health care  organizations  through its approximately  1,000
affiliated  audiologists.  It then  processes  claims  under those  contracts on
behalf of the audiologists in exchange for a fee.

The Company,  through Sonus-USA,  operates a franchise  licensing program called
The Sonus  Network.  Licensees  are  entitled  to use the Sonus name and receive
other  benefits such as practice  management  advice and training,  group buying
discounts,  and marketing  services.  There are currently 9 licensees  under the
licensing program located in 3 states.

INDUSTRY BACKGROUND

Professionals  and  Clinics.  Hearing  instruments  may be dispensed by either a
dispensing audiologist or a hearing instrument specialist ("HIS"). Although both
audiologists  and  HISs  may  be  licensed  to  dispense  hearing   instruments,
audiologists  have  advanced  training in audiology and hold either a masters or
Ph.D. degree.

Overall, dispensing audiologists are much younger than HISs. The June 1998 issue
of The  Hearing  Review,  a  hearing  industry  trade  journal,  indicates  that
approximately  24% of HISs in the U.S.  are at  least  61 years of age,  30% are
51-60 years of age, 33% are 41-50 years of age and only 13% are age 40 or under,
compared to 5%, 21%, 45% and 29%, respectively, for dispensing audiologists. The
Company   believes  that  many  HISs  are  facing   retirement  with  no  formal
"exit-strategy," a situation that creates an attractive  investment  opportunity
for the Company.

The  typical  hearing  care  practice  wields  little   purchasing   power  with
manufacturers, and must spread overhead over a relatively small revenue base. In
addition,  a typical  hearing care practice  often has  insufficient  capital to
purchase new  technologies  and lacks the systems and size  necessary to develop
economies  of  scale.  As  a  result,   the  Company  believes  that  dispensing
audiologists  and  HISs  will  find it  increasingly  attractive  to sell  their
practices to or affiliate with larger organizations, such as the Company.

Another  factor that may favor the  consolidation  of hearing care  practices is
managed care. As managed care becomes more pervasive, hearing care professionals
will  have an  even  greater  need  for the  information  resources,  management
expertise,  economies of scale,  and access to managed care group contracts that
larger organizations such as the Company may be better able to provide. However,
managed  care is not  presently  a large  part of the  hearing  care  market and
hearing  care  products  and  services  are likely to  continue  to be  provided
predominantly on a private pay basis for the next several years.
                                      -3-
<PAGE>
Notwithstanding  the factors  favoring  consolidation of hearing care practices,
there are currently only a few multiple clinic  networks  operating in more than
one state or  province  in the  United  States or Canada  with  combined  annual
revenues in excess of $5 million.

Hearing  Impaired  Population.  According to the 1996  edition of  Communication
Facts, published by the American Speech-Language Hearing Association, the number
of  persons  in the  United  States who have  hearing  loss is  estimated  to be
approximately  28 million and the percentage of individuals  with a hearing loss
relative to the general  population is approximately 2% for those under 18 years
of age, 5% for those  between 18 and 44 years of age,  14% for those  between 45
and 64 years of age,  23% for those  between  65 and 74 years of age and 32% for
those over 75 years of age.  In  addition,  the  American  Tinnitus  Association
estimates that approximately 12 million American adults have tinnitus (a ringing
sensation in the ears) that is severe enough to seek medical help.

The Company  believes  that the widely  recognized  demographic  trend toward an
aging  population  will  increase  the demand for hearing  instrument  sales and
audiological  services and that the demand for hearing instruments that are less
visible  and for newer  and  superior  hearing  instrument  technology,  such as
digital and  programmable  hearing  instruments,  will also contribute to market
growth.  In addition,  the Company believes that some individuals  forgo hearing
care  because  of the  stigma of aging  that can be  associated  with  wearing a
hearing  instrument and that the demand for hearing instrument sales and hearing
care  services can be increased by marketing  and  education  designed to reduce
that stigma.

Hearing Health Care Industry Segments.  The hearing health care industry serving
patients  with  hearing and balance  disorders  is  comprised  of four  distinct
service segments:

         o     hearing  rehabilitation  services,  including the  evaluation and
               rehabilitation  of persons with hearing  impairments by assessing
               communicative impairment and providing amplification;

         o     advanced     audio-diagnostic     services,     including     the
               neuro-audiologic  evaluation and non-medical diagnosis of hearing
               and balance disorders;

         o     industrial  and  preventative  audiological  services,  including
               noise level measurements, dosimetry, and hearing screenings; and

         o     otolaryngologic  services,  including  surgery and other  medical
               treatment.

The Company's  clinics primarily provide hearing  rehabilitation  services.  The
Company has one facility,  the Rockyview  Hearing and Balance  Clinic located in
Calgary,  Alberta,  that  provides  advanced  audio-diagnostic  services and one
clinic located in San Diego, California,  that provides evaluation and treatment
for patients with tinnitus.

Hearing  rehabilitation  services include the assessment and  rehabilitation  of
persons  with hearing  impairments  through the use of hearing  instruments  and
counseling.   Rehabilitation  services,  including  amplification  systems,  are
provided by audiologists  and HISs. The services  offered include the diagnostic
audiological testing,  fitting and dispensing of hearing instruments,  follow-up
rehabilitative  assistance,  the sale of hearing instrument  batteries,  hearing
instrument repairs,  and the sale of swim plugs, custom ear plugs, and assistive
listening devices.

Advanced  audio-diagnostic  services  include  the  assessment  and  non-medical
treatment of vestibular  and balance  disorders  and the  evaluation of patients
with specific symptoms of an auditory or vestibular disorder,  including hearing
loss, tinnitus,  and balance problems. In order to make a differential diagnosis
of hearing  disorders,  an ear,  nose and throat  physician  may employ or refer
patients  to an  audiologist  to conduct  special  diagnostic  hearing  tests to
differentiate between conductive, sensory, and neural pathology. If the cause of
the hearing loss is a medical  disorder in either the nervous system (neural) or
the middle ear  (conductive),  the physician  proceeds  with medical  treatment.
However,  if a non-treatable  conductive or sensory loss is found, the physician
will generally refer the patient to an audiologist for rehabilitation.

GROWTH STRATEGY

The  Company's  growth  strategy  is to expand  its  operations  by  selectively
acquiring hearing clinics located in existing as well as new geographic  markets
and by increasing the number of licensees under the Company's licensing program.
The Company  believes that the  fragmented  nature of the hearing care industry,
the absence of industry-wide standards, and the inexperience and limited capital
resources of many hearing care  providers,  combine to provide an opportunity to
build an expanding  network of  Company-owned  and licensed hearing care clinics
devoted to providing high-quality hearing health care services.
                                      -4-
<PAGE>
The  Company  plans to expand its network of  Company-owned  clinics in each new
market by  initially  targeting  for  acquisition  a  significant  hearing  care
practice  in order to secure a solid  foundation  upon which to build a regional
network of audiology practices. The Company will then seek to acquire additional
individual  or  group  practices  in  order  to  realize  economies  of scale in
management,  marketing, and administration,  and hopes that its initial purchase
in the region will  attract  other  practitioners  interested  in selling  their
businesses. Due to the contacts of management with audiologists in the industry,
the Company is frequently  presented with  opportunities to acquire hearing care
clinics.  From August 1, 1996,  to September 30, 1998,  the Company  acquired 85
clinics, all located in the United States.

The  Company  looks at the  following  factors  before  acquiring  clinics  in a
particular  geographic  market:  (a)  population  size  and  distribution;   (b)
audiology  practice  density,  saturation  and  average  group  size;  (c) local
competitors;  (d) level of managed care penetration;  and (e) local industry and
economy. In acquiring particular clinics within a geographic market, the Company
seeks clinics with the following  characteristics:  (a) an  established  patient
base drawing from a substantial metropolitan population; (b) significant revenue
and profitability prior to acquisition;  (c) above-average  potential to enhance
clinic profitability after acquisition;  and (d) if a clinic has an audiologist,
a willingness by the audiologist to enter into an employment  agreement with the
Company in order to retain  continuity in patient service and  relationships and
maintain the identity of the clinic in the community where it is located.

Prior to acquiring a hearing care clinic,  the Company  conducts a due diligence
investigation of the clinic's  operations that includes an analytical  review of
the clinic's  financial  statements,  tax returns,  and other  operating data, a
review of patient files on a random sample  basis,  a review of credit  reports,
contracts,  bank deposits,  and other documents and information that the Company
deems significant,  and the preparation of financial  projections.  Based on the
information  collected and analyzed during the due diligence review, the Company
determines an appropriate purchase price for the acquisition.

The Company generally uses cash, its common shares, promissory notes, assumption
of debt, or a combination of the foregoing to fund acquisitions. The amount paid
for each  practice  varies  on a  case-by-case  basis  according  to  historical
revenues, projected earnings after integration into the Company, and transaction
structure.   In  connection  with  each   acquisition,   the  Company   acquires
substantially  all of the assets of the  practice,  including  its  audiological
equipment and supplies,  office lease and improvements,  receivables and patient
files.

At the time a practice is acquired, the audiologist associated with the practice
typically  becomes an employee  of the  Company  and enters  into an  employment
agreement  with the  Company  with an  initial  term of three  years and  annual
renewals  thereafter.  The employment  agreement  usually  includes a three-year
non-compete  provision following  termination of employment.  If the office of a
retiring  HIS is  acquired,  a six-  to  12-month  transition  plan  is  usually
negotiated with the HIS.

There can be no assurance that the Company will be able to complete acquisitions
consistent with its expansion  plans,  that such  acquisitions  will be on terms
favorable  to the  Company,  or that the  Company  will be able to  successfully
integrate  the  hearing  care  clinics  that  it  acquires  into  its  business.
Successful  integration  will be dependent upon  maintaining  payor and customer
relationships and converting the management  information  systems of the clinics
the Company acquires to the Company's systems. Significant expansion could place
a strain on the Company's  managerial and other resources and could  necessitate
the  hiring  of  a  number  of  new  managerial  and  administrative  personnel.
Unforeseen  problems  with future  acquisitions  or failure to manage  expansion
effectively  may have a  material  adverse  effect  on the  business,  financial
condition, and results of operations of the Company.

OPERATING STRATEGY

The  Company's  operating  strategy is to provide its patients with high quality
and cost  effective  hearing care  products and services  while at the same time
increasing  its  operating   margins  by  attracting  and  retaining   patients,
recruiting qualified and productive  audiologists,  achieving economies of scale
and  administrative  efficiencies,  and  pursuing  large group and managed  care
contracts.

Attracting and Retaining Patients. The Company seeks to attract new patients and
retain  existing  patients at each clinic by providing  patients with  friendly,
comprehensive,   and  cost-effective   hearing  care  at  convenient  times  and
locations. In addition, by educating patients about hearing health issues and by
providing quality service during office visits and consistent  patient follow-up
and  support,  the Company  hopes to foster  patient  loyalty and  increase  the
likelihood of obtaining referrals and repeat visits for examinations and product
purchases.

Recruiting Qualified and Productive  Audiologists.  Audiologists employed by the
Company  are  primarily  responsible  for  clinic  profitability  as well as for
attracting and retaining customers. The Company seeks to employ audiologists who
share the Company's goal of delivering high-quality hearing care service and who
are also  dedicated to expanding  and  enhancing
                                      -5-
<PAGE>
their practices.  The Company believes that it can offer significant benefits to
audiologists by providing  assistance in  administrative  tasks  associated with
operating  an  audiology  practice,  thereby  allowing  them to focus on serving
patients and  increasing  productivity.  The Company also believes that its size
and structure  enable it to offer financial  resources for practice  development
and enhancement that solo and small group practitioners find difficult to obtain
independently.  Achieving Economies of Scale and Administrative  Efficiencies. A
key operating strategy of the Company is to achieve increased economies of scale
and  administrative  efficiencies  at  each of its  clinics.  When a  clinic  is
acquired by the Company,  it immediately has available to it terms and discounts
with hearing instrument  manufacturers that are generally more favorable than it
could  negotiate  independently.  In  addition,  the  Company  believes  that by
centralizing certain management and administrative  functions such as marketing,
billing,  collections,  human resources,  risk management,  payroll, and general
accounting services,  the profitability of a clinic can be improved by spreading
the cost of such functions over a larger revenue base. The Company has developed
an on-line management  information system that links a substantial number of the
Company's clinics with the Company's corporate  headquarters in order to provide
management with the ability to collect and analyze clinic data, control overhead
expenses,  allow detailed  budgeting at the clinic level,  and permit  effective
resource management.

Pursue Large Group and Managed Care  Contracts.  Although the Company intends to
continue to aggressively pursue  private-payor  business because it is presently
more pervasive and profitable than managed care business,  the Company  believes
that by  providing  comprehensive  geographic  coverage in a  particular  market
through its Company-owned clinics and through its licensees, it will be strongly
positioned to offer services to group hearing care plans in that market. Managed
care arrangements typically shift some of the economic risk of providing patient
care  from the  person  who pays  for the  care to the  provider  of the care by
capping  fees,  requiring  reduced  fees,  or  paying  a  set  fee  per  patient
irrespective of the amount of care delivered. With respect to hearing care, such
limits could result in reduced  payments  for  services or  restrictions  on the
types of services  for which  reimbursement  is  available  or the  frequency of
replacements  or  upgrades  of  equipment.  At the present  time,  managed  care
penetration  of the hearing  care market is limited.  However,  if managed  care
begins to play a larger  role in  hearing  care,  the  Company  plans to develop
information  systems  to  improve  productivity,  manage  complex  reimbursement
methodologies,  measure patient satisfaction and outcomes of care, and integrate
information from multiple sources.

Many third-party insurers impose restrictions in their health insurance policies
on the frequency with which hearing instruments may be upgraded or replaced on a
reimbursable  basis.  Such  restrictions  have  a  negative  impact  on  hearing
instrument  sales volume.  There can be no guarantee that such insurers will not
implement other policy  restrictions in the future in order to further  minimize
reimbursement for hearing care. Such restrictions  could have a material adverse
effect  on  the  Company's  business,   financial  condition,   and  results  of
operations.

CLINIC STAFFING AND FACILITIES

Typically,  each  Company-owned  hearing  clinic  is  staffed  with at least one
audiologist and one patient care coordinator,  who handles reception,  clerical,
and most bookkeeping functions.  The Company currently employs approximately 135
audiologists.  Where  volume  warrants,  a  clinic  may  also  be  staffed  with
additional  audiologists and patient care coordinators.  An audiologist employed
by the Company has a masters or Ph.D.  degree in audiology.  The  audiologist is
licensed by the appropriate  state or province to dispense  hearing  instruments
and is a member of the Canadian Association of Speech/Language  Pathologists and
Audiologists or the American Speech--Language Hearing Association.

Each of the Company's  hearing  clinics  operates in leased space that ranges in
size from 800 to 3,000 square feet depending on patient volume and the extent of
services  provided by the clinic.  Clinics  generally  have a reception  seating
area,  a  reception  work and  filing  area,  an office for the  audiologist,  a
laboratory  for hearing  instrument  repairs  and  modifications,  a  technology
demonstration  room and an evaluation room. A properly  equipped office offering
only hearing  rehabilitation  services requires  equipment that costs $50,000 to
$75,000.  The cost of equipment for a clinic offering advanced  audio-diagnostic
services is much greater and ranges from $225,000 to $250,000.

PRODUCTS AND SUPPLIERS

The  hearing  instrument  manufacturing  industry  is  highly  competitive  with
approximately 40 manufacturers  serving the worldwide market.  Few manufacturers
offer significant  product  differentiation.  The Company currently  purchases a
large  percentage  of its hearing  instruments  from five primary  manufacturers
based upon  criteria  that include  quality,  price,  and  service.  The Company
recently  began offering a line of  private-label  hearing  instruments  that is
being marketed as the Sonus Digital Hearing  System(TM).  In addition to hearing
instruments,  the  Company's  clinics  also offer a limited  selection  of other
assistive listening devices and hearing instrument accessories.

                                      -6-
<PAGE>
MARKETING

The  Company's  marketing  program is designed to help its hearing  care clinics
retain  existing  patients and expand the  services  they  receive,  attract new
patients, and develop contracts to serve large groups of patients.

The Company  believes  that patient  satisfaction  is the key to  retaining  and
expanding  services  to  existing  patients.  The  Company  also  believes  that
delivering  comfortable,  high quality  hearing care at times and locations that
are convenient for the patient will motivate patients to return to the Company's
clinics for their future  hearing care needs.  Educating  patients about hearing
health,  prescribing only necessary  hearing enhancing  products,  ensuring that
each  patient  leaves  a clinic  with a  future  visit  already  scheduled,  and
maintaining  consistent  patient  follow-up  and support are key elements of the
Company's plan to build patient loyalty and patronage.

After a  patient  has  obtained  a  hearing  instrument,  ongoing  revenues  are
generated from battery purchases and routine maintenance of the instruments. The
Company  believes that repeat  revenues are  attributable  to the length of time
that a  clinic  has  been  established  and  the  effectiveness  of its  patient
retention programs.

The Company  believes that the same aspects of the Company's  approach that earn
the loyalty of current  patients will also generate new patients.  The Company's
new  patient  marketing  programs  are  designed  to help the  Company  generate
referrals  from  physicians  and existing  patients  and increase the  Company's
visibility  in the  community.  The Company  seeks to foster such  visibility by
developing  marketing  materials and  information  sources that  communicate the
Company's philosophy of high quality patient-oriented hearing care.

The Company's large group  marketing  approach is designed to enable the Company
to develop  contacts  with  self-insured  employers and with health plans in the
metropolitan  areas it serves and emphasizes the  convenience,  quality of care,
and wide  range of  services  offered by the  Company.  The  economies  of scale
available to the Company may also allow health plans and self-insured  employers
served by the  Company to reduce  administrative  burdens  they might  otherwise
face. The Company  believes that it is well  positioned to respond to challenges
presented by the growth of managed care arrangements as they arise.

COMPETITION

The hearing care industry in the United  States and Canada is highly  fragmented
and intensely competitive. Many of the Company's competitors are small retailers
that focus primarily on the sale of hearing  instruments.  However,  the Company
also  competes  with other  networks  of  hearing  care  clinics  and with large
distributors of hearing  instruments such as Bausch & Lomb, a hearing instrument
manufacturer  that  distributes its products  through a national network of over
1,000 franchised and company-owned stores (Miracle-Ear), and Beltone Electronics
Corp., a privately-owned  hearing  instrument  manufacturer that distributes its
products   primarily  through  its  nationwide   network  of  approximately  600
franchised  dealers.  These competitors are in many cases better known and owned
by companies having far greater  financial and other resources than the Company.
There can be no assurance that one or more of these competitors will not seek to
compete  directly in the markets  targeted by the Company,  nor can there be any
assurance that the largely fragmented hearing care market cannot be successfully
consolidated by other companies or through the  establishment of  co-operatives,
alliances, confederations or the like.

REGULATION

The sale of hearing  instrument devices is regulated at the federal level in the
United States by the United States Food and Drug Administration  ("FDA"),  which
has been granted broad  authority to regulate the hearing care  industry.  Under
federal law, hearing  instruments may only be sold to individuals who have first
obtained  a medical  evaluation  from a  licensed  physician,  although  a fully
informed adult may waive a medical evaluation in certain instances.  Regulations
promulgated  by the FDA  also  presently  require  that  dispensers  of  hearing
instruments  provide  customers with certain  warning  statements and notices in
connection  with the sale of hearing  instruments and that such sales be made in
compliance with certain labeling requirements.

Most states in the United States and many  provinces in Canada have  established
formal  licensing  procedures  that require the  certification  of  audiologists
and/or HISs.  Although the extent of regulation  varies by jurisdiction,  almost
all states and provinces engage in some degree of oversight of the industry. The
Company operates its hearing care clinics through its wholly owned subsidiaries,
Sonus-USA  and  Sonus-Canada.  These  subsidiary  corporations  employ  licensed
audiologists  and HISs who offer and perform  audiology  services  and  dispense
hearing instruments on behalf of the Company.

In certain states in the United States,  business corporations such as Sonus-USA
may not be authorized to employ audiologists

                                      -7-
<PAGE>
and offer  audiology  services.  For example,  in California,  where the Company
operates  39  clinics,   although  the  performance  of  audiology  services  by
professional  corporations  owned solely by licensed  audiologists  is expressly
authorized  under  California  law,  it  is  unclear  whether  general  business
corporations  such as  Sonus-USA  may employ  licensed  audiologists  to perform
audiology services.  However, the California  Department of Consumer Affairs has
indicated by memorandum that speech-language  pathologists,  which are regulated
under statutes and  regulations  similar to those  governing  audiologists,  may
practice  in  a  general  business  corporation  and  that  a  general  business
corporation may provide  speech-language  pathology  services  through  licensed
speech  pathologists.  In  Illinois,  where the Company has seven  hearing  care
clinics,  it is also unclear whether general  business  corporations  may employ
licensed  audiologists to perform audiology  services.  Under Illinois law, only
professional  corporations  and individuals are authorized to obtain licenses to
practice audiology.

The laws and  regulations  governing  the practice of audiology  are enforced by
regulatory  agencies with broad  discretion.  If the Company were found to be in
violation of such laws and regulations in one or more states,  the  consequences
could include the  imposition  of fines and  penalties  upon the Company and its
audiologists  as well as the  issuance of orders  prohibiting  the Company  from
operating  its clinics  under its present  structure.  In that event,  among the
solutions  the Company might  consider  would be the  restructuring  of all or a
portion of its  operations in a manner  similar to that used by certain  medical
and dental clinic networks.  Under such a structure,  professional  corporations
owned by  licensed  audiologists  would  contract  with the  Company  to perform
professional  services  and the Company  would  contract  with the  professional
corporations to provide management services.

No assurance can be given that the Company's  activities  will be found to be in
compliance  with  laws and  regulations  governing  the  corporate  practice  of
audiology or, if its  activities  are not in  compliance,  that the  operational
structure of the Company can be modified to permit compliance.  In addition,  no
assurance  can be given  that other  states or  provinces  in which the  Company
presently  operates will not enact  prohibitions  on the  corporate  practice of
audiology or that the  regulatory  framework of certain  jurisdictions  will not
limit the  ability  of the  Company  to expand  into such  jurisdictions  if the
Company  is unable to  modify  its  operational  structure  to comply  with such
prohibitions or to conform with such regulatory  framework.  Additional laws and
regulations  may be adopted in the future at the  federal,  state,  or  province
level  that  could have a material  adverse  effect on the  business,  financial
condition, and results of operations of the Company.

A portion of the revenues of the hearing  care  clinics  operated by the Company
comes from  Medicare and Medicaid  programs.  Federal law  prohibits  the offer,
payment,  solicitation  or receipt of any form of remuneration in return for, or
in order to induce, (i) the referral of a Medicare or Medicaid patient, (ii) the
furnishing  or arranging for the  furnishing  of items or services  reimbursable
under Medicare or Medicaid programs or (iii) the purchase, lease or order of any
item or service reimbursable under Medicare or Medicaid.  Noncompliance with the
federal  anti-kickback  legislation  can result in exclusion  from  Medicare and
Medicaid programs and civil and criminal penalties.

Because of its franchise  licensing program,  The Sonus Network,  the Company is
subject to state and  federal  regulation  governing  franchising.  Much of this
regulation  involves providing detailed  disclosure to a prospective  franchisee
and periodic registration by the franchisor with state administrative  agencies.
Additionally, some states have enacted, and others have considered,  legislation
that governs the  termination or non-renewal of a franchise  agreement and other
aspects of the  franchise  relationship.  The United  States  Congress  has also
considered legislation of this nature. The Company believes that it has complied
with all applicable franchise laws and regulations.

PRODUCT AND PROFESSIONAL LIABILITY; PRODUCT RETURNS

In the ordinary  course of its  business,  the Company may be subject to product
and  professional  liability  claims alleging the failure of, or adverse effects
claimed to have been  caused  by,  products  sold or  services  provided  by the
Company. The Company maintains insurance against such claims at a level that the
Company believes is adequate.  A customer may return a hearing instrument to the
Company  and obtain a full refund up to 60 days after the date of  purchase.  In
general, the Company can return hearing instruments returned by customers within
60 days to the manufacturer for a full refund.  The Company  maintains a reserve
based on estimated  returns to account for returns that cannot be passed through
to the manufacturers and must be absorbed by the Company.

EMPLOYEES

At October 1, 1998, the Company had 263 full-time and 90 part-time employees, of
which 103 are audiologists practicing full time and 32 are practicing part-time.
None of the Company's  employees are  represented  by a labor union.  Management
believes it maintains good relationships with its employees.

                                      -8-
<PAGE>
SERVICE AND ENFORCEMENT OF LEGAL PROCESS

The Company is incorporated  under the laws of the Province of Alberta,  Canada.
Some of the  directors,  controlling  persons and officers of the  Company,  are
residents  of Canada and all or a portion of the assets of such  persons  and of
the Company are located  outside of the United  States.  As a result,  it may be
difficult for holders of the Company's  securities to effect  service within the
United States upon those directors, controlling persons and officers who are not
residents  of the  United  States,  or to  realize  in the  United  States  upon
judgments of courts of the United  States  predicated  upon the civil  liability
provisions  of the United  States  federal  securities  laws to the extent  such
judgments  exceed  such  person's  United  States  assets.  The Company has been
advised by its Canadian counsel,  Ballem MacInnes, that there is doubt as to the
enforceability  in Canada  against the Company or against any of its  directors,
controlling  persons or officers who are not residents of the United States,  in
original  actions or in actions for  enforcement  of judgments of United  States
courts, of liabilities  predicated solely upon United States federal  securities
laws.  The  Company's  agent for  service of process in the United  States is MN
Service Corp.  (Oregon),  111 S.W. Fifth Avenue,  Suite 3500,  Portland,  Oregon
97204, telephone (503) 224-5858.


ITEM 2.  DESCRIPTION OF PROPERTY

The Company's executive offices are located in approximately  12,400 square feet
of leased  office  space in  downtown  Portland,  Oregon.  The lease  expires on
September  30,  2004 and  provides  for an annual  base rent of  $235,200  until
October 1, 2003,  when the annual base rent  increases to $273,060.  Each of the
Company's  hearing clinics operates in leased space that ranges in size from 800
to 3,000 square feet.  All of the locations are leased for one to six-year terms
pursuant  to  generally  non-cancelable  leases  (with  renewal  options in some
cases).  The aggregate  committed  rental  expense as of July 31, 1998,  for the
subsequent five-year period is approximately $4.7 million.

ITEM 3.  LEGAL PROCEEDINGS

None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

                                      -9-
<PAGE>
                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON SHARES

The Company's  common shares ("Common  Shares") were traded on The Alberta Stock
Exchange  until  February  10,  1998,  at which time they  began  trading on the
American Stock  Exchange.  The following  table sets forth the reported high and
low sales prices in Canadian and United States dollars for the Common Shares for
the periods indicated:


<TABLE>
                                          CANADIAN $                UNITED STATES $(1)
FISCAL YEAR              PERIOD           HIGH        LOW           HIGH         LOW
<S>                   <C>                 <C>         <C>           <C>          <C> 
1997                  First Quarter       14.25       10.00         10.40        7.30
                      Second Quarter      12.90       9.30          9.45         7.00
                      Third Quarter       12.25       6.25          8.95         4.45
                      Fourth Quarter      9.85        6.25          7.10         4.50

1998                  First Quarter       10.75       7.75          7.75         5.60
                      Second Quarter      13.00       8.50          9.05         6.00
                      Third Quarter       13.64       10.84         9.50         7.63
                      Fourth Quarter      14.36       9.15          9.50         6.25
</TABLE>


(1)  For reported  prices  prior to February  10,  1998,  the high and low sales
     prices were converted to United States dollars as of the date of sale.

HOLDERS AND DIVIDENDS

As of October 1, 1998, there were 67 holders of record of Common Shares.

For as long as  Warburg,  Pincus  Ventures,  L.P.,  beneficially  owns at  least
3,333,333 Series A Convertible  Preferred Shares or the Common Shares into which
such shares are convertible, the Company may not, without such holder's consent,
pay any dividend or distribution on its Common Shares.

CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

Following  is  a  summary  of  the  principal   Canadian   federal   income  tax
considerations  under  the  Income  Tax Act  (Canada)  (the  "Tax  Act") and the
regulations  thereunder  generally  applicable  to a holder of Common Shares and
who,  for  purposes of the Tax Act,  holds such shares as capital  property  and
deals at arm's  length  with  the  Company.  Generally,  Common  Shares  will be
considered to be capital  property to a holder provided the holder does not hold
the Common  Shares in the course of carrying on a business  and has not acquired
them in one or more transactions  considered to be an adventure in the nature of
trade.  Special rules apply to non-resident  insurers that carry on an insurance
business in Canada and elsewhere.

This summary is based upon the provisions of the Tax Act in force as of the date
hereof,  all  specific  proposals  to amend the Tax Act that have been  publicly
announced  prior to the date hereof (the  "Proposed  Amendments")  and counsel's
understanding of the current published administrative and assessing policies and
practices of Revenue Canada,  Customs,  Excise and Taxation ("Revenue  Canada").
For the purposes of this  summary,  it has been assumed that the Tax Act will be
amended as  proposed,  although no assurance  can be given in this regard.  This
summary is not exhaustive of all possible federal income tax  consequences  and,
except for the Proposed Amendments,  does not anticipate any changes in the law,
whether by legislative, governmental or judicial decision or action, nor does it
take into account provincial,  territorial or foreign tax considerations,  which
may  differ  significantly  from those  discussed  herein.  This  summary is not
applicable to  subscribers  who are traders or dealers in  securities,  a holder
that is a "financial  institution" as defined in the Tax Act for purposes of the
mark-to-market  rules,  or to a  holder  of an  interest  which  would be a "tax
shelter investment" as defined in the Proposed Amendments.

                                      -10-
<PAGE>
THIS  SUMMARY IS OF A GENERAL  NATURE ONLY AND IS NOT INTENDED TO BE, AND SHOULD
NOT BE  CONSTRUED  TO  BE,  LEGAL  OR  TAX  ADVICE  TO  ANY  PARTICULAR  HOLDER.
ACCORDINGLY,  HOLDERS SHOULD CONSULT THEIR  INDEPENDENT  TAX ADVISERS FOR ADVICE
WITH  RESPECT  TO THE  INCOME  TAX  CONSEQUENCES  RELEVANT  TO THEIR  PARTICULAR
CIRCUMSTANCES.

The following applies to holders of Common Shares who are not resident in Canada
for purposes of the Tax Act and who do not use or hold and are not deemed to use
or hold their Common  Shares in, or in the course of,  carrying on a business in
Canada.

Dispositions of Common Shares. A non-resident holder will, upon a disposition or
deemed disposition of Common Shares, not be subject to taxation in Canada on any
gain  realized  on the  disposition  unless  the shares  are  "taxable  Canadian
property"  for the  purposes of the Tax Act and no relief is  afforded  under an
applicable  tax  convention  between  Canada and the country of residence of the
holder.  Since the Common Shares are listed on a prescribed  stock  exchange for
the purposes of the Tax Act,  Common Shares held by a  non-resident  holder will
generally  not be "taxable  Canadian  property"  unless,  at any time during the
five-year period immediately preceding the disposition, the non-resident holder,
persons with whom the non-resident  holder did not deal at arm's length,  or the
non-resident  holder  together  with  such  persons,  owned or had the  right to
acquire  25% or more of the  issued  shares of any class of the  capital  of the
Company.  Any  interest  in shares  or  options  in  respect  of shares  will be
considered to be the  equivalent of ownership of such shares for purposes of the
definition of taxable Canadian property.

Subject  to the  comments  set out below in respect  of the  application  of the
Canada-United  States Income Tax  Convention,  1980 (the  "Convention")  to U.S.
resident  holders,  non-residents  whose  shares  constitute  "taxable  Canadian
property"  will be subject  to  taxation  thereon on the same basis as  Canadian
residents  unless  otherwise  exempted by an applicable tax  convention  between
Canada and the country of residence of the holder.

Pursuant to the  Convention,  shareholders  of the Company that are residents in
the U.S. for the purposes of the Convention and whose shares might  otherwise be
"taxable  Canadian  property" may be exempt from Canadian taxation in respect of
any gains on the disposition of the Common Shares,  provided the principal value
of the Company is not derived from real  property  located in Canada at the time
of disposition.

Non-resident  holders who might hold their  Common  Shares as "taxable  Canadian
property"  should  consult their own tax advisers with respect to the income tax
consequences of a disposition of their Common Shares.

Non-resident  holders  whose shares are  repurchased  by the Company,  except in
respect of certain  purchases  made by the Company in the open  market,  will be
deemed to have  received  the  payment of a dividend by the Company in an amount
equal to the  excess  paid over the  paid-up  capital  of the  Common  Shares so
purchased.  Such deemed dividend will be excluded from the holder's  proceeds of
disposition  of the Common Shares for the purposes of computing any capital gain
or loss but will be  subject to  Canadian  non-resident  withholding  tax in the
manner described below under "--Dividends."

Dividends.  Dividends received by a non-resident holder of Common Shares will be
subject to  Canadian  withholding  tax at the rate of 25% of the amount  thereof
unless the rate is reduced under the  provisions of an applicable tax convention
between Canada and the country of residence of the holder. The provisions of the
Convention generally reduce the rate to 15%. A further reduction to 5% under the
Convention  will be available if the  recipient is a company which owns at least
10% of the voting shares of the Company.

INVESTMENT CANADA ACT

The Investment  Canada Act (the "ICA") prohibits the acquisition of control of a
Canadian business by non-Canadians without review and approval of the Investment
Review Division of Industry Canada,  the agency that administers the ICA, unless
such  acquisition  is exempt from review  under the  provisions  of the ICA. The
Investment  Review  Division of Industry  Canada must be notified of such exempt
acquisitions.  The ICA covers acquisitions of control of corporate  enterprises,
whether by purchase of assets,  shares or "voting  interests"  of an entity that
controls,  directly  or  indirectly,  another  entity  carrying  on  a  Canadian
business.

Apart from the ICA,  there are no other  limitations on the right of nonresident
or foreign  owners to hold or vote  securities  imposed by  Canadian  law or the
Company's  Articles.  There are no other decrees or  regulations  in Canada that
restrict the export or import of capital,  including foreign exchange  controls,
or that  affect the  remittance  of  dividends,  interest  or other  payments to
nonresident  holders  of  the  Company's  Common  Shares,  except  as  discussed
elsewhere herein.

                                      -11-
<PAGE>
SALES OF UNREGISTERED SECURITIES DURING FISCAL 1998

On  October 8, 1997,  the  Company  issued  25,925  Common  Shares to a Canadian
resident  pursuant to the conversion of a convertible note issued by the Company
in the amount of approximately  $128,000. The Company issued 5,000 Common Shares
on November 5, 1997,  and 5,000 Common Shares on January 15, 1998, to a Canadian
resident for a total of $8,700 in  connection  with the  exercise of  previously
granted stock  options.  On February 27, 1998, the Company issued 373,998 Common
Shares at $5.23 per share  pursuant to the exercise of share  purchase  warrants
issued by the Company in February  1996. On March 31, 1998,  the Company  issued
22,936 Common Shares to the owner of Hearing and Speech  Associates,  Inc.,  and
Tri-County  Hearing Aid Center,  Inc., in connection with the acquisition of all
of the outstanding  shares of these  corporations.  The shares are being held by
the Company  and will be released  over a  three-year  period if certain  annual
revenue  targets are met. On July 31, 1998,  the Company  issued  148,720 Common
Shares to Abbingdon  Venture  Partners  L.P.,  14,256 Common Shares to Abbingdon
Venture  Partners  L.P.-II,  and 57,024  Common  Shares to Business  Development
Capital L.P. III as a result of the  conversion  to Common  Shares of $1,430,000
aggregate principal amount of convertible  subordinated notes due July 31, 1998.
The Company  relied on the exemption  provided by Section 4(2) of the Securities
Act of 1933  (the"1933  Act") with  respect  to the  issuance  of Common  Shares
described  above. On March 17, 1998, in reliance on Rule 701 under the 1933 Act,
the  Company  issued a total of 2,400  Common  Shares  to three  employees  upon
exercise of stock options  granted  under the Company's  Stock Award Plan for an
aggregate  exercise  price of  $17,400.  There were no other  securities  of the
Company  issued without  registration  under the 1933 Act during the fiscal year
ended July 31, 1998,  except as previously  reported in the Company's  quarterly
reports on Form 10-QSB filed during the fiscal year.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

OVERVIEW

During the fiscal year ended July 31,  1998,  the Company  achieved  significant
growth in revenues, primarily due to the acquisition and operation of additional
hearing  care  clinics.  For the fiscal  year ended July 31,  1998,  the Company
generated  total revenues of $22.4  million.  As of July 31, 1998, the Company's
cumulative deficit was $6.7 million and its total shareholders' equity was $23.1
million.  For the fiscal year ended July 31,  1998,  the Company  incurred a net
loss of $4.6 million, compared to a net loss of $1.7 million for the 1997 fiscal
year.

ACQUISITIONS

During the fiscal year ended July 31, 1998, the Company  acquired 33 clinics and
one hearing care benefit  administrator  in 18 transactions for a total purchase
price of  $6,409,000.  The total  purchase  price  consisted of cash payments of
$3,361,000,  promissory  notes  issued by the  Company of  $1,781,000  generally
payable over three years,  and $1,267,000 in assumed  liabilities.  In addition,
$1,405,000  will be paid in cash and 22,936  Common Shares that have been issued
and are held by the Company will be released over a three-year period if certain
annual net revenue targets are met. As a result of the acquisitions, the Company
recorded approximately $1,528,000 in accounts receivable, $942,000 in inventory,
property  and  equipment,  $158,000  in  other  assets,  $1,468,000  in  current
liabilities and $6,508,000 in goodwill.  The Company also recorded  $623,000 for
covenants  not to  compete,  of which  $157,000  was paid in cash at the time of
closing, with the balance payable over three years.

The 34 hearing care  businesses  acquired by the Company  during the fiscal year
ended July 31, 1998,  have combined  historical  revenues for their  immediately
preceding fiscal years of approximately $11.5 million. The Company expects these
clinics to contribute to the Company's  future  revenues  consistent  with their
historical  revenues,  as well as have a positive effect on cash flow and future
liquidity.

As of July 31,  1998,  the  Company had  recorded  $15,611,000  in goodwill  and
$1,578,000  in covenants not to compete.  The  amortization  of the  unamortized
balance totaling  $16,152,000 at July 31, 1998, which represented  approximately
47% of the Company's  total assets,  will result in an annual non-cash charge to
earnings of  approximately  $854,000 in each of the next 20 years. If all of the
covenants  not to  compete  referred  to above  were  currently  in  effect,  an
additional non-cash charge to earnings of approximately  $500,000 in each of the
current and next two fiscal years would also be incurred.

RESULTS OF OPERATIONS

Year Ended July 31, 1998, Compared to Year Ended July 31, 1997

Revenues.  Total  revenues  for the  fiscal  year  ended  July  31,  1998,  were
$22,368,000,  representing a 66% increase over revenues of  $13,462,000  for the
prior fiscal year.  Of this  increase,  $3,760,000  was  attributable  to the 34
businesses  acquired during fiscal 1998. Product sales revenues were $18,792,000
for the  1998  fiscal  year,  up 64%  from  the  $11,472,000  for 

                                      -12-
<PAGE>

fiscal 1997. Audiological service revenues increased from $1,943,000,  or 14% of
total revenues in fiscal 1997, to $3,311,000,  or 15% of total revenues, for the
1998 fiscal year.

Gross Profit on Product  Sales.  Product  gross profit for the fiscal year ended
July 31, 1998, was $11,080,000 compared to $6,642,000 for the prior fiscal year.
Gross profit  percentage on product sales was 59% for fiscal 1998 versus 56% for
fiscal  1997.  The  increase in gross  profit  percentage  on product  sales was
primarily  attributable  to higher  volume  discounts,  improved  product  sales
management, and an increase in the percentage of total revenues derived from the
Company's  operations in the United States,  where gross profit  percentages are
higher than those for the Company's operations in Canada.

Clinical Expenses. Clinical expenses include all personnel, marketing, occupancy
and other  operating  expenses at the clinic  level.  Clinical  expenses for the
fiscal year ended July 31, 1998, were  $12,297,000,  representing an increase of
105% over  clinical  expenses of  $5,985,000  for the prior  fiscal  year.  This
increase  was  primarily  due  to  clinical  expenses  associated  with  the  34
additional  businesses  that were owned by the  Company  during the fiscal  year
ended July 31, 1998,  but not owned  during the prior fiscal year and  increased
marketing  expenses  designed to increase brand  awareness of the Company within
the hearing health industry.

General  and  Administrative  Expenses.   General  and  administrative  expenses
increased  73% from  $3,410,000  for the fiscal  year ended  July 31,  1997,  to
$5,896,000 for the fiscal year ended July 31, 1998, due to planned  increases in
corporate  staff and other  corporate  expenses  related to the  operation  of a
larger organization as well as one-time expenses incurred in connection with the
implementation  of the Company's  franchise  licensing  program,  consulting and
professional  fees,  and  inventory  revaluations.  As a percentage of revenues,
general and  administrative  expenses rose to 26% for the fiscal year ended July
31,  1998,  versus 25% for the prior fiscal year.  Management  anticipates  that
general and administrative expenses will decrease as a percentage of revenues as
the Company establishes a larger revenue base through its strategic  acquisition
program and enhanced marketing efforts.

Depreciation and Amortization Expense. Depreciation and amortization expense for
the fiscal year ended July 31, 1998, was $1,361,000, an increase of 72% over the
depreciation and amortization expense of $790,000 for the prior fiscal year. The
increase  resulted from the  depreciation  of fixed assets and  amortization  of
goodwill  and  covenants  not to  compete  associated  with  the  34  additional
businesses operated by the Company during the fiscal year ended July 31, 1998.

Interest Income and Expense.  Interest income for the fiscal year ended July 31,
1998, increased to $452,000 from $76,000 for the prior fiscal year. The increase
was due to  higher  balances  of cash  and  short-term  investments  held by the
Company  as a result of the sale of  preferred  stock in  December  1997 and the
exercise  of  warrants to purchase  Common  Shares in  February  1998.  Interest
expense  for the fiscal  year ended July 31,  1998,  was  $149,000  compared  to
$47,000  for the fiscal  year ended July 31,  1997,  due to higher  balances  of
long-term debt incurred in connection with acquisitions.

LIQUIDITY AND CASH RESERVES

For the fiscal year ended July 31, 1998,  net cash used in operating  activities
was $2,203,000  compared to $606,000 for fiscal 1997. The Company  invested cash
of $3,765,000 in business  acquisitions,  $1,414,000 in property and  equipment,
and  $6,408,000  in the purchase of short-term  investments  for the fiscal year
ended July 31, 1998, compared to $2,858,000,  $1,191,000,  and $0, respectively,
for the fiscal year ended July 31,  1997.  During the fiscal year ended July 31,
1998, the Company received cash, net of costs, of $1,984,000 for the issuance of
Common Shares,  primarily in connection  with the exercise of warrants issued in
February  1996,  and  $15,701,000  for  the  issuance  of  13,333,333  Series  A
Convertible Preferred Shares together with warrants to purchase 2,000,000 Common
Shares  for $12 per share,  in a private  placement.  The  Company  also  repaid
long-term  debt of  $1,625,000  and bank  loans  and  short-term  notes  payable
totaling $39,000 during fiscal 1998.

Sonus-Canada,  the  Company's  Canadian  operating  subsidiary,  has a revolving
demand loan with a commercial  bank,  providing for borrowings up to $198,000 at
July 31, 1998. As of July 31, 1998,  $46,000 was outstanding  against this line.
Advances  under the line of credit bear  interest  at 1% above the bank's  prime
rate and are secured by all the assets of Sonus-Canada.

At July 31, 1998,  the Company had working  capital of  $6,309,000  and cash and
short-term  investments totaling $9,128,000.  The Company believes that its cash
and short-term  investments,  along with cash generated  from  operations,  will
provide  it with  sufficient  capital  to fund its  operations  over the next 12
months and to use up to $1,000,000 for acquisitions during that time period. The
Company's   capital   expenditures   during  fiscal  1999  are  budgeted  to  be
approximately  $1,700,000,  with  $533,000  committed  as of  October  1,  1998.
Additional  funding  will be needed to finance  operations  and planned  capital
expenditure  beyond  that time  period  and to fund the  Company's  strategy  to
acquire additional hearing care clinics.  These funding  requirements may result
in the Company incurring long-term and short-term indebtedness and in the public
or private issuance, from time to time, of additional equity or debt securities.
Any such  issuance of equity may be dilutive  to current  shareholders  and debt
financing may impose significant restrictive covenants on

                                      -13-
<PAGE>
the Company. There can be no assurance that any such financing will be available
to the Company or will be available on terms acceptable to the Company.

YEAR 2000

The "Year  2000  problem"  refers to the  possibility  that  computer  and other
systems  could fail or not work properly as a result of these systems using only
the last two digits of a year to refer to that year and  therefore  being unable
to properly  recognize a year that begins with "20" instead of "19". The Company
has undertaken a review of the potential effects of the Year 2000 problem on its
business on a system by system basis.

With respect to its information  technology ("IT") systems, the Company believes
that the computer  hardware and system software of its IBM AS/400  computer,  on
which its patient management system and accounting system operate, are Year 2000
compliant.  Unrelated to Year 2000 issues,  the Company is currently  developing
new patient  management  system  software that its  development  contractor  has
represented  will  meet  Year  2000  standards.  Development  of  the  software,
including related hardware upgrades, is expected to cost approximately  $700,000
of which  approximately  $69,000 had been incurred as of July 31, 1998.  The new
software  is  scheduled  to be  completed  by the  end of  December  1998,  with
implementation  during  the  following  six  months.  The  Company  will also be
installing a new release of its accounting and financial  reporting  software in
November 1998 that the vendor  represents is Year 2000  compliant.  The cost for
installing the new release is expected to be less than $10,000. In the first six
months of 1999,  the Company  will be  surveying  all of its  servers,  personal
computers,   and  network  hardware  to  determine  compliance  with  Year  2000
standards.  All equipment  found to be deficient  will be replaced.  The Company
estimates that the cost of replacement equipment will be less than $50,000.

The  Company  is  currently   reviewing  its  non-IT  systems  (primarily  voice
communications)  for Year 2000  compliance  and expects that this review will be
completed by January 1999.  The Company  estimates  that its cost to replace any
non-IT systems that are found to be non-compliant  with Year 2000 standards will
not exceed $125,000.

The Company also faces the risk that  vendors  from which the Company  purchases
goods and services, such as hearing instrument manufacturers, utility providers,
the banks that maintain the Company's depository accounts and process its credit
card transactions,  and the Company's payroll  processor,  may have systems that
are not Year 2000  compliant.  Significant  disruptions in the operations of its
vendors may have a material adverse effect on the Company.  The Company plans to
monitor the  progress of its major  vendors in achieving  Year 2000  compliance.
However,  the Company  presently  does not  anticipate  the  occurrence of major
interruptions in its business due to Year 2000 issues.

The Company has not  established a contingency  plan to address  potential  Year
2000  noncompliance  with respect to the Company's systems or those of its major
vendors  and is  currently  considering  the  extent  to  which  such a plan  is
necessary.  Due to the Company's dependence on systems outside its control, such
as  telecommunications,  transportation,  and  power  supplies,  there can be no
assurance that the Company will not face unexpected problems associated with the
Year  2000  issue  that may  affect  its  operations,  business,  and  financial
condition.

ACCOUNTING PRONOUNCEMENTS

The Company  will adopt  Statement of Financial  Accounting  Standards  No. 130,
"Reporting  Comprehensive  Income,"  ("SFAS No. 130") for its fiscal year ending
July  31,  1999.  SFAS  No.  130  establishes  requirements  for  disclosure  of
comprehensive  income. The objective of SFAS No. 130 is to report all changes in
equity that result from transactions and economic events other than transactions
with  owners.  Comprehensive  income  is the total of net  income  and all other
non-owner  changes in equity.  The Company does not anticipate  any  significant
impact on reported results of operations due to the adoption of SFAS No. 130.

The Company will also adopt Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," ("SFAS No.
131") for its fiscal  year ending  July 31,  1999.  SFAS No. 131 changes the way
segment  information  is  reported  for  public  companies  and  requires  those
companies to report selected segment information in interim financial reports to
shareholders. Although the Company has not fully determined its complete impact,
the Company does not foresee any material change due to adoption of SFAS No. 131
on its financial presentation to shareholders.

In June 1998,  Statement of Financial Accounting Standards No. 133 , "Accounting
for Derivative  Instruments and Hedging Activities" ("SFAS No. 133") was issued.
SFAS No. 133 standardizes the accounting for derivative instruments by requiring
that an entity  recognize  those items as assets or liabilities in the financial
statements  and  measure  them at fair  value.  SFAS No. 133 is  required  to be
adopted for fiscal years beginning  after June 15, 1999.  Since the Company does
not hold any  derivative  instruments,  SFAS No. 133 is not  expected to have an
impact on the Company's financial statements.

                                      -14-
<PAGE>
In April 1998, the American  Institute of Certified  Public  Accountants  issued
Statement  of Position  98-5,  "Reporting  on the Costs of Start-Up  Activities"
("SOP 98-5") which requires that costs of start-up activities and organizational
costs be expensed as incurred.  SOP 98-5 is effective for  financial  statements
for fiscal years beginning after December 15, 1998. Although the Company has not
fully determined its complete impact,  the Company does not foresee any material
change  due  to  adoption  of  SOP  98-5  on  its  financial   presentation   to
shareholders.

                                      -15-
<PAGE>
ITEM 7.  FINANCIAL STATEMENTS

              REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS


TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
SONUS CORP.:


We have  audited the  accompanying  consolidated  balance  sheets of Sonus Corp.
(previously  HealthCare  Capital Corp.) and subsidiaries as of July 31, 1998 and
1997,  and the related  consolidated  statements  of  operations,  shareholders'
equity,  and cash flows for each of the years in the two-year  period ended July
31, 1998. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of Sonus
Corp.  and  subsidiaries  as of July 31,  1998 and  1997,  and the  consolidated
results  of their  operations  and their cash flows for each of the years in the
two-year  period  ended July 31,  1998 in  conformity  with  generally  accepted
accounting principles.


                              /s/ KPMG Peat Marwick LLP



Portland, Oregon
October 23, 1998

                                      -16-
<PAGE>
                                   SONUS CORP.
                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)

<TABLE>
                                                             July 31,           July 31,
                                                               1998               1997
                                                         ------------------   --------------

                                  ASSETS
Current assets:
<S>                                                      <C>                  <C>          
     Cash and cash equivalents                           $           2,720    $       1,099
     Short-term investments                                          6,408              ---
     Accounts receivable, net of allowance
       for doubtful accounts
       of $684 and $97, respectively                                 3,339            2,514
     Other receivables                                                 515              314
     Inventory                                                         967              425
     Prepaid expenses                                                  270              260
                                                         ------------------   --------------
            Total current assets                                    14,219            4,612

Property and equipment, net                                          3,607            2,277
Other assets                                                           151              136
Goodwill and covenants not to compete, net                          16,152            9,519
                                                         ------------------   --------------

                                                         $          34,129    $      16,544
                                                         ==================   ==============

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Bank loans and short-term notes payable             $              46    $          59
     Accounts payable                                                2,879            2,260
     Accrued payroll                                                 1,110              486
     Other accrued liabilities                                       2,595              649
     Convertible notes payable                                         ---            2,600
     Capital lease obligation, current portion                         120              101
     Long term debt, current portion                                 1,160              357
                                                         ------------------   --------------
            Total current liabilities                                7,910            6,512

Capital lease obligation, non-current portion                          223              305
Long term debt, non-current portion                                  1,733              765
Convertible notes payable                                            1,170              127
                                                         ------------------   --------------
            Total liabilities                                       11,036            7,709

Commitments and contingencies (Note 12)

Shareholders' equity:
     Series A convertible preferred stock, no par
          value per share, 13,333,333 and 0 shares,
          respectively, authorized, issued, and outstanding         15,701              ---
     Common stock, no par value per share, unlimited
          number of shares authorized, 6,079,908 and 5,427,657
          shares, respectively, issued and outstanding              14,673           11,131
     Notes receivable from shareholders                               (283)            (124)
     Accumulated deficit                                            (6,711)          (2,117)
     Cumulative translation adjustment                                (229)             (22)
     Treasury stock, 6,960 and 3,960 shares, respectively, at cost     (58)             (33)
                                                         ------------------   --------------
            Total shareholders' equity                              23,093            8,835
                                                         ------------------   --------------

                                                         $          34,129    $      16,544
                                                         ==================   ==============
</TABLE>

           See accompanying notes to consolidated financial statements

                                      -17-
<PAGE>
                                   SONUS CORP.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)


                                                         Years ended
                                                             July 31,
                                                 -----------------------------
                                                    1998             1997
                                                 ------------     ------------

Net revenues                                     $    22,368      $    13,462

Costs and expenses:
     Cost of products sold                             7,712            5,010
     Clinical expenses                                12,297            5,985
     General and administrative expenses               5,896            3,410
     Depreciation and amortization                     1,361              790
                                                 ------------     ------------

Total costs and expenses                              27,266           15,195
                                                 ------------     ------------


Loss from continuing operations                       (4,898)          (1,733)


Other income (expense):
      Interest income                                    452               76
      Interest expense                                  (149)             (47)
      Other, net                                           1                3
                                                 ------------     ------------

Net loss                                         $    (4,594)     $    (1,701)
                                                 ============     ============


Per share of common stock:
    Basic                                        $     (0.89)     $     (0.42)
    Diluted                                      $     (0.89)     $     (0.42)

Average shares outstanding:
    Basic                                              5,167            4,010
    Diluted                                            5,167            4,010

          See accompanying notes to consolidated financial statements.

                                       -18-
<PAGE>
                                   SONUS CORP.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                        (in thousands, except share data)

<TABLE>
                                                Number of        Number of                                Shareholder
                                                  Shares          Shares       Preferred      Common         Notes
                                             Preferred Stock   Common Stock       Stock        Stock      Receivable
                                             ---------------   ------------    ---------      -------     -----------
<S>                                            <C>               <C>           <C>          <C>           <C>      
BALANCE AT JULY 31, 1996                             --          3,565,549     $    --      $   1,925            --
  Stock issued in connection
     with receipt of tax credit                      --             22,560          --             38            --
  Proceeds from exercise of stock options            --            155,000          --            316          (124)
  Stock issued in connection
     with acquisitions                               --            587,876          --          3,291            --
  Stock issued under private
     placement (net proceeds)                        --          1,093,482          --          5,529            --
  Proceeds from exercise of warrants                 --              7,150          --             32            --
  Repurchase of common stock                         --             (3,960)         --             --            --
  Translation adjustment                             --                 --          --             --            --
  Net loss                                           --                 --          --             --            --
                                                 ------          ---------     -------      ---------     --------- 
BALANCE AT JULY 31, 1997                             --          5,427,657     $    --      $  11,131     $    (124)
                                                 ======          =========     =======      =========     ========= 

    Stock issued upon conversion
       of convertible note                           --             25,925          --            128            --
    Stock issued in connection with acquisition
         contingent upon satisfaction of certain
            conditions (Note 2)                      --             22,936          --             --            --
   Repurchase of common stock                        --             (3,000)         --             --            --
  Proceeds from exercise of stock options            --             10,000          --              9            --
  Stock issued in connection with
       Series A convertible preferred
        stock, net of costs                  13,333,333                         15,701             --            --
  Proceeds from exercise
    of warrants                                      --            373,998          --          1,957            --
  Proceeds from exercise
    of stock options                                 --              2,400          --             18            --
  Advance on shareholder notes                       --                 --          --             --          (159)
  Stock issued upon
    conversion of convertible notes                  --            220,000          --          1,430            --
  Payment of cash in lieu of fractional shares       --                 (8)         --             --            --
  Translation adjustment                             --                 --          --             --            --
  Net loss                                           --                 --          --             --            --
                                             ----------          ---------     -------        -------          ----
BALANCE AT JULY 31, 1998                     13,333,333          6,079,908     $15,701        $14,673          (283)
                                             ==========          =========     =======        =======          ====
</TABLE>


<TABLE>
                                                               Cummulative                     Total
                                               Accumulated     Translation     Treasury     Shareholders'
                                                 Deficit        Adjustment       Stock         Equity  
                                               -----------     ------------    --------     -------------
<S>                                            <C>             <C>             <C>            <C>    
BALANCE AT JULY 31, 1996                       $   (416)       $         3     $    --        $ 1,512
  Stock issued in connection                             
     with receipt of tax credit                      --                 --          --             38
  Proceeds from exercise of stock options            --                 --          --            192
  Stock issued in connection
     with acquisitions                               --                 --          --          3,291
  Stock issued under private
     placement (net proceeds)                        --                 --          --          5,529
  Proceeds from exercise of warrants                 --                 --          --             32
  Repurchase of common stock                         --                 --         (33)           (33)
  Translation adjustment                             --                (25)         --            (25)
  Net loss                                       (1,701)                --          --         (1,701)
                                                 ------        -----------     -------        -------
BALANCE AT JULY 31, 1997                         (2,117)       $       (22)    $   (33)       $ 8,835
                                                 ======        ===========     =======        =======

    Stock issued upon conversion
       of convertible note                           --                 --          --            128
     Stock issued in connection with acquisition
         contingent upon satisfaction of certain
            conditions (Note 2)                      --                 --          --             --
   Repurchase of common stock                        --                 --         (25)           (25)
  Proceeds from exercise of stock options            --                 --          --              9
  Stock issued in connection with
     Series A convertible preferred
     stock, net of costs                             --                 --          --         15,701
  Proceeds from exercise
     of warrants                                     --                 --          --          1,957
  Proceeds from exercise
     of stock options                                --                 --          --             18
  Advance on shareholder notes                       --                 --          --           (159)
  Stock issued upon
     conversion of convertible notes                 --                 --          --          1,430
  Payment of cash in lieu of fractional shares       --                 --          --             --
  Translation adjustment                             --               (207)         --           (207)
  Net loss                                       (4,594)                --          --         (4,594)
                                                -------        -----------     -------        -------
  BALANCE AT JULY 31, 1998                      $(6,711)       $      (229)    $   (58)       $23,093
                                                =======        ===========     =======        =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      -19-
<PAGE>
                                      SONUS CORP.
                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (in thousands)


<TABLE>
                                                                     Years ended
                                                                       July 31,
                                                             --------------------------
                                                                  1998           1997
                                                             --------------------------

Cash flows from operating activities:
<S>                                                             <C>           <C>      
     Net loss                                                   $ (4,594)     $ (1,701)
     Adjustments to reconcile net loss to net cash
     used in operating activities:
        Provision for bad debt expense                               412            47
        Depreciation and amortization                              1,361           790
     Changes in non-cash working capital:
        Accounts receivable                                          (51)         (536)
        Other receivables                                           (181)         (237)
        Inventory                                                   (405)          (61)
        Prepaid expenses                                              24          (136)
        Accounts payable and accrued liabilities                   1,231         1,222
                                                             ------------   -----------
               Net cash used in operating activities              (2,203)         (606)
                                                             ------------   -----------

Cash flows from investing activities:
     Purchase of short-term investments                           (6,408)          ---
     Purchase of property and equipment                           (1,414)       (1,191)
     Additional costs related to acquisitions                       (198)         (149)
     Deferred acquisition costs and other, net                        (1)          177
     Net cash paid on business acquisitions                       (3,765)       (2,858)
                                                             ------------   -----------
               Net cash used in investing activities             (11,786)       (4,021)
                                                             ------------   -----------

Cash flows from financing activities:
     Net repayments of long-term debt
          and capital lease obligations                           (1,625)          (58)
     Deferred financing costs, net                                   (20)           42
     Advances on (repayments of) bank loans and
          short-term notes payable                                   (39)            0
     Advances to shareholders                                       (159)         (124)
     Issuance of common stock for cash, net of costs               1,984         5,915
     Issuance of preferred stock for cash, net of costs           15,701           ---
     Acquisition of treasury stock                                   (25)          (33)
                                                             ------------   -----------
               Net cash provided by financing activities          15,817         5,742
                                                             ------------   -----------

Net increase in cash and cash equivalents                          1,828         1,115

Effect on cash and cash equivalents of changes
     in foreign translation rate                                    (207)          (27)

Cash and cash equivalents, beginning of period                     1,099            11

                                                             ============   ===========
Cash and cash equivalents, end of period                         $ 2,720       $ 1,099
                                                             ============   ===========


Supplemental disclosure of non-cash investing and financing activities:
  Interest paid during the period                                    149            47
  Non-cash financing activities:
     Issuance and assumption of long-term debt in acquisitions     1,781           676
     Issuance of convertible notes in acquisitions                   ---         2,600
     Issuance of common stock in acquisitions                        ---         3,291
     Issuance of common stock upon conversion of convertible note  1,557           ---
</TABLE>

           See accompanying notes to consolidated financial statements

                                      -20-
<PAGE>
NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Description of Company
        ----------------------

        Sonus Corp.  (formerly  HealthCare  Capital Corp.),  an Alberta,  Canada
corporation  (the  "Company"),   through  its  primary  operating  subsidiaries,
Sonus-Canada Ltd., a British Columbia, Canada corporation,  and Sonus-USA, Inc.,
a Washington  corporation,  currently  owns and operates a network of 89 hearing
care clinics in the United States and Western Canada. The clinics are located in
the states of Arizona,  California,  Illinois,  Michigan,  Missouri, New Mexico,
North Dakota,  Oregon, and Washington,  and in the Canadian provinces of British
Columbia and Alberta.  Each of the Company's  hearing care clinics  provides its
hearing  impaired  patients  with a full  range  of  audiological  products  and
services.  The Company  intends to expand its network of hearing care clinics by
acquiring  clinics in its  existing,  as well as new,  geographic  markets.  The
Company,  through its recently  acquired  subsidiary Hear PO Corp., a New Mexico
corporation,  also operates as an independent  provider  association and hearing
care benefit  administrator,  which  obtains  contracts to provide  hearing care
benefits to managed care group and corporate health care  organizations  through
its approximately 1,000 affiliated  audiologists and then processes claims under
those contracts on behalf of the audiologists in exchange for a fee.

        Principles of Consolidation
        ---------------------------

        The consolidated financial statements include the Company's wholly owned
subsidiaries.  All significant inter-company accounts have been eliminated.  The
functional  currency of the Company's Canadian operations is the Canadian dollar
while the  functional  currency of the  Company's  U.S.  operations  is the U.S.
dollar. In accordance with Statement of Financial  Accounting  Standards No. 52,
"Foreign  Currency  Translation",  assets and  liabilities  recorded in Canadian
dollars are  remeasured at current rates in existence at the balance sheet date.
Revenues and expenses are remeasured  using the weighted  average  exchange rate
for the  period  Exchange  gains and  losses  from  remeasurement  of assets and
liabilities  recorded in Canadian  dollars are treated as  unrealized  gains and
losses and reported as a separate component of shareholders' equity

        Revenue Recognition
        -------------------

        Revenues from the sale of hearing instrument  products are recognized at
the time of delivery.  Revenues  from the  provision of hearing care  diagnostic
services  are  recognized  at the time that such  services  are  performed.  Net
revenues consist of the following (in thousands):

                                                                   July 31,

<TABLE>
                                                        1998                           1997
                                                        ----                           ----
<S>                                                   <C>                             <C>    
        Product revenue                               $18,792                         $11,472
        Service revenue                                 3,311                           1,943
        Other revenue                                     265                              47
                                                      -------                         -------
                                                     $22,368                          $13,462
                                                     =======                          =======
</TABLE>

        Income Taxes
        ------------

        The Company  accounts  for income  taxes  under the asset and  liability
method.  Under  the  asset  and  liability  method,   deferred  tax  assets  and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards.  Deferred tax assets and  liabilities  are measured using enacted
tax rates  expected  to apply to  taxable  income  in the  years in which  those
temporary  differences  are 

                                      -21-
<PAGE>
expected  to be  recovered  or settled.  The effect on  deferred  tax assets and
liabilities  of a change in tax rates is recognized in income in the period that
includes the enactment date.

        Cash and Cash Equivalents
        -------------------------

        Cash equivalents  consist of short-term,  highly liquid investments with
original maturities of 90 days or less.

        Short-term Investments
        ----------------------

        Short-term  investments  consist of  available-for-sale  securities,  as
defined by Statement of Financial  Accounting Standards No. 115, "Accounting for
Certain  Investments in Debt and Equity Securities" ("SFAS No. 115"). Under SFAS
No. 115,  unrealized holding gains and losses are reflected as a net amount in a
separate  component of  shareholders'  equity until realized.  At July 31, 1998,
there were no  unrealized  holding  gains or losses as the  market  value of the
Company's available-for-sale  securities approximated cost. Gross realized gains
and losses on sales of  available-for-sale  securities  for fiscal 1998 and 1997
were nominal.  Realized gains and losses are computed by  determining  cost on a
specific identification basis.

        At July 31, 1998, the Company's short-term  investments consisted of the
following debt securities  which had maturities of less than six months and were
carried at cost which approximated market (in thousands):

               Corporate Bonds               $  2,760
               Discount Commercialal Paper      3,648
                                             --------
                                             $  6,408
                                             ========

The Company did not have any short-term investments at July 31, 1997.

        Gross   proceeds  from  sales  and   maturities  of   available-for-sale
investments during fiscal 1998 and 1997 were $18,511,000 and $0, respectively.

        Inventory
        ---------

        Inventories are stated at the lower of cost (first in, first out) or net
realizable value.

        Property and Equipment
        ----------------------

        Property and  equipment are recorded at cost and  depreciated  using the
straight-line method over the following useful lives:

        Professional equipment                      Seven years
        Office equipment                            Five years
        Automotive equipment                        Five years
        Leasehold improvements                      Five years
        Computer equipment                          Five years

        In the year of  acquisition,  depreciation is calculated at one-half the
above noted rates. Property and equipment purchased under capitalized leases are
amortized over the shorter of the lease term or their estimated  useful life and
such  depreciation is included with depreciation  expense.  On November 1, 1997,
the Company  changed the method by which it calculates  depreciation on property
and equipment to the straight-line method.  Previously,  professional  equipment
was depreciated  using the 20% declining  balance method and office and computer
equipment and  automobiles  were  depreciated  using the 30%  declining  balance
method.  The Company also adopted a useful life of seven years for  professional
equipment and five years for office  equipment and  automobiles.  The cumulative
effect of the changes  adopted by the Company for the fiscal year ended July 31,
1998, was not material.

                                      -22-
<PAGE>
        Advertising Expenses
        --------------------

        The Company  defers its  advertising  costs until the  advertisement  is
actually run, at which time the full expense is recognized. Deferred advertising
costs were $0 and $89,000 at July 31, 1998 and 1997,  respectively.  Advertising
expense was  $2,786,000 and $786,000 for the years ended July 31, 1998 and 1997,
respectively.

        Goodwill and Covenants Not to Compete
        -------------------------------------

        The  unallocated  purchase  costs in excess of the net  assets  acquired
(goodwill)  is being  amortized on the  straight-line  basis over twenty  years.
Non-compete  agreements are amortized on the straight-line basis over the period
benefited. Goodwill and covenants not to compete are as follows (in thousands):

<TABLE>
                                                                                 July 31,
                                                                            1998          1997
                                                                            ----          ----

<S>                                                                       <C>             <C>  
                       Goodwill                                           $15,611         8,966
                       Covenants not to compete                             1,578           955
                       Less:  Accumulated amortization                     (1,037)         (402)
                                                                           -------        -----
                                                                          $16,152         9,519
                                                                           =======        =====
</TABLE>

        The Company  assesses the  recoverability  of this  intangible  asset by
determining  whether the amortization of the goodwill balance over its remaining
life can be recovered  through  undiscounted  projected future cash flows of the
acquired  businesses  from which the  goodwill  arose.  Amortization  charged to
operations was $635,000 and $364,000 for the years ended July 31, 1998 and 1997,
respectively.

        Deferred Acquisition and Financing Costs
        ----------------------------------------

        Costs  related to the  acquisition  of clinics are  deferred  and,  upon
successful completion of acquisitions,  are allocated to the assets acquired and
are  subject  to the  accounting  policies  outlined  above.  Costs  related  to
potential  acquisitions  that are  unsuccessful  are  expensed in the periods in
which it is determined  that such  acquisitions  are unlikely to be consummated.
Costs  related  to issuing  shares are  deferred  and upon the  issuance  of the
related shares, are applied to reduce the net proceeds of the issue.

        Earnings Per Share
        ------------------

        In February  1997,  the  Financial  Accounting  Standards  Board  issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128").  SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies  the  computation,   presentation,  and  disclosure  requirements  for
earnings  per share  ("EPS") for  entities  with  publicly  held common stock or
potential  common  stock.  It replaces  the  presentation  of primary EPS with a
presentation  of basic EPS and fully  diluted EPS with diluted  EPS.  Basic EPS,
unlike  primary  EPS,  excludes  dilution  and is computed  by  dividing  income
available to common shareholders by the weighted-average number of common shares
outstanding  for the period.  Diluted EPS reflects the  potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or  converted  into common stock or resulted in the issuance of common
stock that  would  then share in the  earnings  of the  entity.  Diluted  EPS is
computed  similarly  to fully  diluted  EPS under APB  Opinion No. 15. All prior
period EPS data have been  restated  to conform to SFAS No.  128.  Common  share
equivalents represented by convertible debt and convertible preferred stock have
not been included in the  calculation  of earnings per share as the effect would
be anti-dilutive.

        Concentrations of Credit Risk
        -----------------------------

        Financial   instruments,   which  potentially  subject  the  Company  to
concentration  of  credit  risk,   consist   principally  of  cash,   short-term
investments, and trade receivables. The Company places its cash with high credit
quality  institutions.  At times,  such  amounts may be in excess of the Federal
Deposit Insurance  Corporation  insurance  limits.  The Company's trade accounts
receivable are derived from numerous private payers, insurance carriers,  health
maintenance organizations and government agencies.  Concentration of credit risk
relating to trade accounts receivable is limited due to the diversity and number
of patients and payers.

                                      -23-
<PAGE>

        Fair Value of Financial Instruments
        -----------------------------------

        The  carrying  value  of  financial  instruments  such as cash  and cash
equivalents,  short-term investments, trade receivables, notes receivable, trade
payables, notes payable, and long-term debt approximate their fair value.

        Use of Estimates
        ----------------

        Management of the Company has made a number of estimates and assumptions
relating  to the  reporting  of assets and  liabilities  and the  disclosure  of
contingent  assets and  liabilities  to prepare  these  financial  statements in
conformity with generally accepted accounting  principles.  Actual results could
differ from those estimates.

        Reverse Stock Split 
        ------------------- 

        Effective February 9, 1998, the Company effected a one-for-five  reverse
stock  split of its common  shares  ("Common  Shares").  All share and per share
information  appearing in the accompanying  financial  statements for the fiscal
year ended July 31, 1997,  has been restated to give effect to the reverse stock
split.

        Reclassifications
        -----------------

        Certain amounts in the 1997 financial  statements have been reclassified
in order to conform to the 1998 presentation.

NOTE 2.  ACQUISITIONS

        During the fiscal  year ended July 31,  1998,  the  Company  acquired 33
clinics and one hearing  care benefit  administrator  in 18  transactions.  Each
transaction was accounted for as a purchase. The acquired assets and liabilities
were recorded at their estimated fair values at the date of acquisition, and the
unallocated  excess  purchase price  (goodwill) is being amortized on a straight
line basis over 20 years.  The operating  results of each  acquisition have been
included  in the  consolidated  statements  of  operations  from the  respective
acquisition date. The aggregate purchase price for the acquisitions consisted of
cash  payments  of  $3,650,000,  promissory  notes  issued  by  the  Company  of
$1,781,000  generally  payable  over  three  years,  and  $3,072,000  in assumed
liabilities. In addition,  $1,405,000 will be paid and 22,936 Common Shares that
have been  issued  but are being held by the  Company  will be  released  over a
three-year  period if certain annual net revenue targets are met. As a result of
the  acquisitions,  the Company  recorded  approximately  $1,186,000 in accounts
receivable,  $137,000 in inventory,  $629,000 in property and equipment, $96,000
in other assets,  and  $6,455,000 in goodwill,  which  included costs related to
acquisitions.  In  addition  to the  purchase  price for the  acquisitions,  the
Company also recorded  $623,000 for covenants not to compete,  of which $157,000
was paid in cash at the time of  closing,  with the balance  payable  over three
years.

        During the fiscal  year ended July 31,  1997,  the  Company  acquired 39
clinics in 12  transactions.  Each  transaction was accounted for as a purchase.
The acquired  assets and  liabilities  were  recorded at their book value at the
date of acquisition  for stock purchases and mergers and at their estimated fair
market  value  for  asset  purchases.  The  unallocated  excess  purchase  price
(goodwill)  is being  amortized  on a straight  line  basis  over 20 years.  The
operating  results of each  acquisition  have been included in the  consolidated
statements of operations  from the  respective  acquisition  date. The aggregate
purchase  price for the  acquisitions  consisted of cash payments of $2,091,000,
promissory  notes  issued by the Company of  $3,277,000  generally  payable over
three years,  587,876  Common Shares and $486,000 in assumed  liabilities.  As a
result of the  acquisitions,  the Company recorded  approximately  $1,629,000 in
accounts receivable,  $220,000 in inventory, $916,000 in property and equipment,
$493,000 in other assets,  $2,096,000 in current  liabilities  and $7,983,000 in
goodwill.  In addition to the purchase price for the  acquisitions,  the Company
also recorded $940,000 for covenants not to compete,  of which $792,000 was paid
in cash at the time of closing, with the balance payable over three years.

NOTE 3.  PROPERTY, PLANT AND EQUIPMENT

        Property and equipment consist of the following (in thousands):

                                      -24-
<PAGE>

<TABLE>
                                                                                  July 31,
                                                                              1998       1997
                                                                              ----       ----

<S>                                                                        <C>         <C>
                Professional equipment                                      $1,521        930
                Office equipment                                               705        481
                Automotive equipment                                             2         16
                Leasehold improvements                                         760        405
                Computer equipment                                           2,012      1,144
                                                                             -----      -----
                                                                             5,000      2,976
                Less accumulated depreciation                               (1,393)      (699)
                                                                             -----      -----
                                                                            $3,607      2,277
                                                                             =====      =====
</TABLE>
NOTE 4.  FINANCING ARRANGEMENTS

        Bank Loan
        ---------

        Sonus-Canada  Ltd.  maintains  a  revolving  bank  demand  loan  bearing
interest at the bank's  prime rate plus 1% per annum (8.5% and 5.75% at July 31,
1998 and 1997,  respectively ), secured by a general security agreement covering
all assets of Sonus-Canada  Ltd. The loan provided for a maximum credit limit of
$198,000 and $182,000 at July 31, 1998 and 1997, respectively,  of which $46,000
and $0 were outstanding at July 31, 1998 and 1997, respectively.

        Short-term Notes Payable
        ------------------------

        At July 31, 1997,  Sonus-USA,  Inc., and  Sonus-Canada  had  outstanding
short-term,   non-interest   bearing  notes  from  certain  hearing   instrument
manufacturers totaling $59,000.

NOTE 5.  LONG-TERM DEBT

        Long-term debt consists of the following (in thousands):
<TABLE>
                                                                                   July 31,
                                                                               1998       1997
                                                                               ----       ----
<S>                                                                          <C>         <C>

        Installment notes incurred in connection with acquisitions payable in
        monthly installments due from 1998 to 2002 with a weighted
        average interest rate of 6.5%........................................$  322     $  348

        Installment notes incurred in connection with acquisitions payable
        in quarterly installments due from 1999 to 2000 with a weighted
        average interest rate of 6%.............................................150        133

        Installment notes incurred in connection with acquisitions payable
        in annual installments due from 1999 to 2003 with a weighted
        average interest rate of 6.3%.........................................1,910        390

        Non-interest bearing installment obligations for covenants not to compete
        due from 1999 to 2001...................................................460         94

        Equipment loan from a supplier bearing interest at 10% payable in monthly
        installments due 2000....................................................51         75

        Equipment loan from suppliers with interest rates from 0%to 9% per annum
        due from 1999 to 2018...................................................---         82
                                                                            -------    -------

                                      -25-
<PAGE>

                                                                              2,893      1,122
         Less current portion................................................(1,160)      (357)
                                                                            -------    -------
                                                                            $ 1,733    $   765
                                                                            =======    =======
</TABLE>

Annual  maturities  of  long-term  debt are as follows  (in  thousands):  1999 -
$1,160; 2000 - $908; 2001 - $598; 2002 - $115; 2003 - $112.

NOTE 6.  CAPITAL LEASES

The  following  is a schedule by year of future  minimum  lease  payments  under
capital leases together with the present value of the net minimum lease payments
as of July 31, 1998 (in thousands):

<TABLE>
<S>                                                                                  <C>  
     1999............................................................................$ 144
     2000..............................................................................142
     2001.............................................................................. 98
                                                                                     -----
     Total minimum lease payments......................................................384
     Less:  amount representing interest.............................................. (41)
                                                                                     -----
     Present value of minimum lease payments...........................................343
     Less current portion.............................................................(120)
                                                                                     -----
                                                                                     $ 223
                                                                                     =====
</TABLE>

Total assets under  capitalized  leases at July 31, 1998 and 1997, were $271,000
and  $305,000,  net  of  accumulated  depreciation  of  $244,000  and  $131,000,
respectively

NOTE 7.  CONVERTIBLE NOTES PAYABLE

        At July 31, 1997, the Company had outstanding non-interest bearing notes
in the amount of $2,600,000  convertible into 400,000 Common Shares at a rate of
$6.50 per share.  During the fiscal year ended July 31, 1998,  $1,430,000 of the
notes were converted into 220,000 Common Shares. At July 31, 1998, $1,170,000 of
the notes  (convertible  into 180,000 Common Shares)  remained  outstanding  and
mature  August  1,  1999.  At July 31,  1997,  the  Company  had  outstanding  a
non-interest bearing note in the amount of approximately  $127,000 due on demand
and convertible  into Common Shares at the rate of $5.00 per share. The note was
converted into 25,975 Common Shares during the fiscal year ended July 31, 1998.

NOTE 8.  SHAREHOLDERS' EQUITY

        Series A Convertible Preferred Shares
        -------------------------------------

        In December  1997, the Company  issued  13,333,333  Series A Convertible
Preferred  Shares  (the  "Convertible  Shares")  in  a  private  placement.  The
following summarizes certain terms of the Convertible Shares:

        Voting Rights. Each Convertible Share is entitled to one-fifth of a vote
(or such other  number of votes equal to the number of Common  Shares into which
such  Convertible  Share shall be convertible from time to time) in the election
of directors and any other matters  presented to the shareholders of the Company
for action or consideration.

        Dividends.  Each Convertible Share is entitled to receive,  when, as and
if declared by the board of directors of the Company out of the Company's assets
legally  available for payment,  cumulative  dividends from the date of original
issuance,  payable  annually at a rate of 5% per annum on a base amount of $1.35
per share  (the  "Base  Amount").  All  accrued  and  unpaid  dividends  will be
forfeited upon the conversion of the  Convertible  Shares.  The dividend rate is
subject to increase on specified dates in the event that certain conditions (the
"Triggering  Conditions")  have not been met. The  Triggering  Conditions are as
follows:

    (a) The  Common  Shares  are  listed  on the New York  Stock  Exchange,  the
American Stock Exchange,  or the Nasdaq National Market (each a "U.S.  Principal
Market");

                                      -26-
<PAGE>

    (b) The  Common  Shares  are  traded on a U.S.  Principal  Market at a daily
closing  price  greater  than  $12.00  per  Common  Share  on  each  of the  ten
consecutive trading days preceding the applicable date; and

    (c)  The  Company's  net  income  before  income  taxes,  dividends  on  the
Convertible  Shares,  and  amortization of goodwill and covenants not to compete
for the three  consecutive  fiscal quarters  preceding the applicable date shall
have  averaged at least $.35 per fully diluted  Common Share per fiscal  quarter
(for purposes of making this  calculation,  the Common Shares  issuable upon the
exercise of warrants issued in connection  with the Convertible  Shares will not
be counted). If the Triggering Conditions have not been met by:

        (x) January 1, 2003, the dividend rate will  thereafter be 15% per annum
of the Base Amount;

        (y) January 1, 2004, the dividend rate will  thereafter be 18% per annum
of the Base Amount; or

        (z) January 1, 2005, the dividend rate will  thereafter be 21% per annum
of the Base Amount.

        As soon as the Triggering  Conditions have been satisfied,  the dividend
rate will revert to 5% per annum of the Base Amount.

        Liquidation  Preference.  In the event of any  voluntary or  involuntary
liquidation,  dissolution, or winding up of the Company subject to the rights of
holders of any  securities  of the  Company  ranking  senior to the  Convertible
Shares upon liquidation,  the holders of Convertible  Shares will be entitled to
receive,  out of the  assets  of  the  Company  available  for  distribution  to
shareholders,  before  any  distribution  of assets is made to holders of Common
Shares or any other  securities  ranking junior to the  Convertible  Shares upon
liquidation, a liquidating distribution in an amount equal to the greater of (i)
$1.35 per share plus any  accrued and unpaid  dividends  or (ii) the amount that
would  have been  distributable  to such  holders  if they had  converted  their
Convertible  Shares into Common Shares  immediately  prior to such  dissolution,
liquidation,  or winding up, plus any  accrued and unpaid  dividends.  The sale,
conveyance,  mortgage, pledge or lease of all or substantially all the assets of
the Company  will be deemed to be a  liquidation  of the Company for purposes of
the liquidation  rights of the holders of Convertible  Shares.  After payment of
the full amount of the liquidating  distribution to which they are entitled, the
holders of Convertible  Shares will have no right to any of the remaining assets
of the Company.

        Optional  Redemption.  The Convertible Shares may not be redeemed before
January 1, 2003.  Thereafter,  the  Convertible  Shares may be  redeemed  at the
option of the  Company,  in whole or in part.  The  redemption  price will be an
amount  equal to the  greater of (i) $1.35 per share plus any accrued and unpaid
dividends or (ii) the fair market value of a Convertible  Share as determined by
a nationally recognized  independent  investment banking firm selected by mutual
agreement  of the  Company  and the  holder  of a  majority  of the  outstanding
Convertible  Shares.  The  Convertible  Shares  are  not  subject  to  mandatory
redemption or any sinking fund provisions.

        Conversion  Rights. The Convertible Shares may be converted at any time,
in whole or in part, at the option of the holder  thereof,  into Common  Shares.
The  conversion  rate is  presently  equal to one  Common  Share for every  five
Convertible Shares surrendered for conversion. The conversion rate is subject to
further  adjustment for stock dividends,  stock splits,  recapitalizations,  and
other anti-dilution adjustments.  Upon the conversion of any Convertible Shares,
any accrued and unpaid  dividends with respect to such shares will be forfeited.
The Company has the right to force  conversion  of the  Convertible  Shares,  in
whole or in part, upon satisfaction of all the Triggering Conditions.

        Release of Escrowed Shares  
        --------------------------  

        Effective  with the listing of the Common  Shares on the American  Stock
Exchange on February 10, 1998, 850,000 common shares owned by certain members of
the  Company's  management  were  released  from  escrow  by The  Alberta  Stock
Exchange.  The  shares,  which had been  excluded  from the  calculation  of the
average  shares  outstanding  during the fiscal  year ended July 31,  1997,  are
included in such calculation for the fiscal year ended July 31, 1998.

                                      -27-
<PAGE>

        Share Purchase Warrants
        -----------------------

        At July 31, 1998, the Company had the following share purchase  warrants
outstanding:

(1) Share purchase  warrants (the  "September  Warrants") to purchase  1,093,482
Common Shares at an exercise price of $10.00 per share.  The September  Warrants
expired on August 31, 1998, without being exercised.

(2) Share  purchase  warrants (the "Agent  Warrants") to purchase  99,180 Common
Shares  at an  exercise  price of $6.25  per share  issued  in  connection  with
placement of the September Warrants.  The Company issued 39,799 Common Shares in
August 1998 in connection  with the exercise of a portion of the Agent Warrants.
The remaining Agent Warrants expired on August 31, 1998.

(3)  Share purchase warrants issued in connection with the Convertible Shares to
     purchase  2,000,000  Common Shares at an exercise price of $12.00 per share
     until December 24, 2002. The Company may force the exercise of the warrants
     upon satisfaction of all the Triggering Conditions.

     In February  1998,  the Company  issued  373,998 Common Shares at $5.23 per
share pursuant to the exercise of share purchase  warrants issued by the Company
in February 1996.

        Stock Option Plans
        ------------------

        The Company has two stock  option  plans,  the Stock  Option Plan ("1993
Plan") and the Second Amended and Restated  Stock Award Plan ("1996 Plan").  The
Company may grant to officers,  directors,  employees and consultants  incentive
and  non-qualified  options to purchase up to 1,800,000  Common Shares under the
1996 Plan. There are options to purchase 245,000 Common Shares outstanding under
the 1993 Plan;  no further  options  will be  granted  under the 1993 Plan.  The
exercise  price of options  granted under the 1996 Plan may not be less than 75%
of the fair market  value of the  Company's  Common  Shares at the date of grant
(100% for tax-qualified incentive stock options).  Options become exercisable at
the date of grant or in equal annual  installments  over a period of one to four
years from the date of grant.  The options  generally  expire either five or ten
years after the date of grant.

        The 1996 Plan also provides for the grant of stock appreciation  rights,
restricted units,  performance awards and other stock-based  awards. The Company
had no such awards or rights outstanding at July 31, 1998 or 1997.

                                      -28-
<PAGE>
        The activity during the fiscal years ended July 31, 1998 and 1997 was as
follows:


<TABLE>
                                             1998                               1997
                                             ----                               ----
                                                   Weighted-                          Weighted-
                                                    Average                            Average
                                  Options       Exercise Price        Options       Exercise Price
                                  -------       --------------        -------       --------------

<S>                                 <C>                    <C>            <C>                 <C>  
Outstanding - beginning of            488,400              $6.41          340,000             $4.15
year

           Granted                  1,138,000              $8.12          368,400             $6.85
          Exercised                   (12,400)             $2.10         (155,000)            $2.05
          Canceled                    (54,000)             $9.79          (65,000)            $7.50
                                    ---------                             -------

Outstanding - end of year           1,560,000              $7.54          488,400             $6.41
Exercisable at end of year          =========                             =======
                                      363,200              $5.98          177,500             $5.95

Weighted-average fair value of
options granted during the year                            $8.38                              $4.47
</TABLE>

        The  following  table   summarizes   information   about  stock  options
outstanding at July 31, 1998:

<TABLE>
                                Options Outstanding                      Options Exercisable
                   -----------------------------------------------  -------------------------------
                                      Weighted-
                       Number          Average        Weighted-         Number         Weighted -
    Range of        Outstanding       Remaining        Average       Exercisable        Average
Exercise Prices        as of         Contractual      Exercise          as of           Exercise
                   July 31, 1998         Life           Price       July 31, 1998        Price
-----------------  ---------------   -------------  --------------  ---------------   -------------
<S>                       <C>               <C>            <C>             <C>             <C>   
 $1.00-- $2.00             60,000            2.39           $1.26           60,000          $ 1.26
 $2.01-- $3.50             25,000            2.55           $3.31           25,000          $ 3.31
 $3.51-- $5.00                 --              --            $ --               --            $ --
 $5.01-- $6.50            166,000            3.34           $6.25           79,700          $ 6.28
 $6.51-- $8.00            883,000            8.43           $6.95          158,500          $ 7.24
 $8.01-- $9.50            120,000            7.32           $8.58               --            $ --
 $9.51-- $12.00           306,000            9.52          $11.11           40,000          $ 9.10
-----------------  ---------------   -------------  --------------  ---------------   -------------

 $1.00-- $12.00         1,560,000            7.69           $7.54          363,200          $ 5.98
</TABLE>

         The  Company  accounts  for  stock  option  grants in  accordance  with
  Accounting  Principles  Board Opinion No. 25,  "Accounting for Stock Issued to
  Employees."  Accordingly,  no  compensation  cost has been  recognized for its
  stock option grants. Pro forma information regarding net income (loss) and net
  income (loss) per share is required  under  Statement of Financial  Accounting
  Standards No. 123, "Accounting for Stock-Based  Compensation" ("SFAS 123") and
  has been  determined  as if the  Company had  accounted  for all 1998 and 1997
  stock option grants based on the fair value method.  The pro forma information
  presented below is not representative of the effect stock options will have on
  pro forma net income (loss) or net income (loss) per share for future years.

         The fair value of each option  grant is  estimated on the date of grant
  using the Black-Scholes multiple  option-pricing model. The following weighted
  average assumptions were used for grants in 1998 and 1997:  risk-free interest
  rates of 5.5% and 5.94%,  respectively,  an expected option life of 7.69 years
  and  4.92  years,   respectively,   expected   volatility  of  114%  and  96%,
  respectively, and dividend yield of zero.

                                      -29-
<PAGE>

         The  Black-Scholes  method is one of many models used to calculate  the
  fair value of options that are freely  tradable,  fully  transferable and that
  have no vesting  restrictions.  These  models also require  highly  subjective
  assumptions,  including  future stock price volatility and expected time until
  exercise, which greatly affect the calculated values.

         Had compensation cost for these plans been determined based on the fair
  value of awards at the grant date,  as prescribed by SFAS 123, net loss or net
  loss per share would have been as follows:

<TABLE>
                                                                         1998        1997
                                                                         ----        ----
                                                                     (in thousands, except
                                                                         per share data)
         Net loss applicable to common shareholders:
<S>                                                                  <C>          <C>     
             As reported                                             $(4,594)     $(1,701)
             Pro forma (1)                                           $(5,988)     $(3,276)
         Net loss per share (basic and diluted):
             As reported                                              $(0.89)     $ (0.42)
             Pro forma (1)                                            $(1.16)     $ (0.82)
</TABLE>

  (1) SFAS 123  applies  to awards  granted in fiscal  years  that  begin  after
  December 15, 1994.  Consequently,  the effects of applying SFAS 123 shown here
  are not likely to be  representative of the effects in future years due to the
  exclusion  of  awards  granted  in prior  years  but  vesting  (and  therefore
  expensed) in 1997 and 1998.

  NOTE 9.  INCOME TAXES

         Sonus Corp. and its Canadian  subsidiary file separate corporate income
  tax returns on a stand-alone basis in Canada.  Sonus-USA,  Inc. files separate
  corporate income tax returns in the United States.

         There was no  provision  for income  taxes for the years ended July 31,
  1998 and 1997 as the Company incurred net operating losses.

         The components of temporary  differences  that give rise to significant
  portions of deferred income taxes are as follows (in thousands):

<TABLE>
                                                                    July 31,
                                                          1998                  1997
                                                          ----                  ----
         Deferred tax assets:
<S>                                                      <C>                   <C>   
           Net operating losses carried forward          $2,443                $  839
           Allowance for doubtful accounts                  277                    44
           Other                                             14                    --
                                                          -----                   ---
                                                          2,734                   883
         Deferred tax liabilities:
           Goodwill and start-up costs                     (240)                  (54)
                                                         ------                  ---- 
                                                          2,494                   829
      Less valuation allowance                           (2,494)                 (829)
                                                         ------                  ---- 
                                                         $  ---                $  ---
                                                         ======                ======

         A  reconciliation  of the  Company's  expected  tax  expense  using the
  statutory income tax rate to the actual effective rate is as follows:

                                                           1998                  1997
                                                           ----                  ----
      Tax benefit at statutory rate                         (34)%                 (34)%
      Adjustment for higher Canadian tax rate                (1)                  ---
      Expenses not deductible for tax purpose                 3                     5
      State taxes, net of federal                            (5)                  ---
      Change in valuation allowance                          37                    29
                                                           ----                  ----
      Tax rate per financial statements                     ---%                  ---%
                                                           ====                  ====
</TABLE>

         At July 31,  1998,  the  Company had  approximate  net  operating  loss
  carryforwards  for tax purposes  which,  if not utilized,  expire in the years
  ended as follows (in thousands):

<TABLE>
                                                                UNITED
                                            CANADA              STATES                  TOTAL
<S>                                <C>                        <C>                   <C>     
         2001                      $         573              $    ---              $    573
         2002                                 26                   ---                    26
         2003                                563                   ---                   563
         2004                                247                   ---                   247
         2005                                294                                         294
         2011                                ---                   616                   616
         2012                                ---                   586                   586
         2013                                                    3,599                 3,599
                                   -------------            ----------               -------
                                   $       1,703                $4,801                $6,504
                                   =============              ========             =========
</TABLE>

  NOTE 10.  RELATED PARTY TRANSACTIONS

         William DeJong is a partner in the Calgary,  Alberta law firm of Ballem
  MacInnes  and is a director  of the  Company.  Total fees,  disbursements  and
  government sales tax paid to Ballem MacInnes by the Company for legal services
  as of July  31,  1998  and  1997  were  $196,000  and  $168,000,  respectively
  (converted from Canadian dollars at July 31, 1998 and 1997).

         In connection with the  acquisition of the Midwest  Division of Hearing
  Health  Services,  Inc.,  Sonus-USA,  Inc.  assumed a  promissory  note with a
  balance of $360,000  payable to Kathy A.  Foltner,  an officer of the Company.
  The promissory note, which is payable in equal annual installments of $120,000
  and bears  interest  at 6% per annum,  has one payment  remaining  due July 1,
  1999.

         Gregory J. Frazer, Ph.D., an officer and director of the Company, was a
  shareholder in certain Hearing Care Associates  corporations  that the Company
  acquired  during the fiscal years ended July 31, 1998 and 1997. For the fiscal
  year ended July 31, 1998, the consideration paid to Mr. Frazer and his wife in
  connection  with  the  acquisitions  and  related  non-competition  agreements
  consisted of $242,179 in cash and $80,520 payable in  installments  over three
  years.  The  consideration  paid to Mr.  Frazer and his wife during the fiscal
  year ended July 31, 1997,  totaled  $933,000 in cash and 294,071 Common Shares
  at a price of $5.00 per share.

         On May 8, 1997,  Brandon M.  Dawson,  an officer  and  director  of the
  Company,  exercised  options for 50,000 Common  Shares at $1.35 per share.  In
  connection with the exercise, the Company made loans of $67,500 and $91,000 to
  Mr.  Dawson on May 8, 1997,  and April 24,  1998,  respectively,  to allow Mr.
  Dawson to pay the aggregate  exercise  price of the options and taxes incurred
  as a result of the  exercise.  The loans  mature on  November 1, 1999 and bear
  interest  at 10% and 7.75%,  respectively.  On October  5, 1997,  the  Company
  loaned Mr. Dawson  $85,000 in connection  with the purchase of his  residence.
  The loan was repaid on April 10, 1998, along with interest at 10% per annum in
  the amount of $4,308.  On December 26,  1997,  the Company  loaned Mr.  Dawson
  $32,342 in order to allow Mr.  Dawson to repay a loan  obtained in  connection
  with the  exercise  of options to  purchase  20,000  Common  Shares.  The loan
  matures on November 1, 1999, and bears  interest at 7.75% per annum.  On March
  19,  1998,  the  Company  loaned  Mr.  Dawson  $35,760,  in order to pay taxes
  incurred as a result of option  exercises  in April 1996.  The loan matures on
  November  1, 1999,  and bears  interest  at 7.75% per annum.  The loans to Mr.
  Dawson are secured by 60,000 Common Shares.

                                      -30-
<PAGE>
         On May 19,  1997,  Gene K.  Balzer,  Ph.D.,  a former  director  of the
  Company,  exercised  options for 40,000 Common  Shares at $1.40 per share.  In
  connection  with such  exercise,  the Company loaned Mr. Balzer $56,000 to pay
  the aggregate exercise price of the options.  The loan is secured by the stock
  underlying the exercised options and accrues interest at 10% per annum.

  NOTE 11.  401(K) PLAN

         The Company sponsors a 401(k) plan for all employees who have satisfied
  minimum  service and age  requirements.  Employees may contribute up to 20% of
  their   compensation  to  the  plan.  The  Company  does  not  match  employee
  contributions.

  NOTE 12.  COMMITMENTS AND CONTINGENCIES

         Operating Leases

         The following is a schedule by year of future  minimum  lease  payments
  for non-cancelable operating leases at July 31, 1998 (in thousands):

         1999                                                       $1,393
         2000                                                        1,108
         2001                                                          913
         2002                                                          745
         2003                                                          519
         Thereafter                                                    605
                                                                    ------
         Total minimum lease payments                               $5,283
                                                                    ======

        Rental  expense under  operating  leases was $1,426,000 and $810,000 for
  the years ended July 31, 1998 and 1997, respectively.

         Insurance
         ---------

         In the normal course of business, the Company may become a defendant or
  plaintiff  in  various  lawsuits.  Although a  successful  claim for which the
  Company is not fully  insured  could have a material  effect on the  Company's
  financial condition,  management is of the opinion that it maintains insurance
  at levels sufficient to insure itself against the normal risk of operations.

  NOTE 13.  SUBSEQUENT EVENTS

        In August and  September of 1998,  the Company  acquired 12 hearing care
clinics  in 4  transactions  for a total  purchase  price  of  $1,812,000.  Each
transaction  was accounted for as a purchase.  The aggregate  purchase price for
the  acquisitions  consisted of cash payments of $942,000 and  promissory  notes
issued by the  Company of  $870,000  payable  over  three  years.  In  addition,
$100,000 will be paid in March 2000 if certain net revenue targets are met. As a
result of the acquisitions, the Company recorded $75,000 in accounts receivable,
$70,000 in inventory,  property and equipment,  $89,000 in other assets, $96,000
in current  liabilities and $1,674,000 in goodwill.  In addition to the purchase
price for the acquisitions, the Company also recorded $220,000 for covenants not
to compete payable over three years.

  NOTE 14.  CANADIAN VERSUS U.S. GAAP

        As of July 31, 1998 and 1997, there were no material differences between
  Canadian generally accepted accounting principles ("GAAP") and U.S. GAAP.

                                      -31-
<PAGE>
NOTE 15. QUARTERLY   RESULTS  OF  OPERATIONS   (UNAUDITED  -  SEE   ACCOMPANYING
         ACCOUNTANTS' REPORT)

        The  following is a tabulation  of the  unaudited  quarterly  results of
operations for the years ended July 31, 1998 and 1997 (in thousands,  except per
share data):
<TABLE>
                                                                Quarter ended                  
                                               October 31,    January 31,   April 30,    July 31,
                                                  1997           1998         1998         1998
                                                  ----           ----         ----         ----

<S>                                             <C>           <C>           <C>          <C>   
Net revenues                                    $  5,307      $  4,109      $ 5,719      $ 7,233
Loss from continuing operations                      (79)       (1,135)        (778)      (2,906)
Net loss                                             (96)       (1,085)        (581)      (2,832)

Earnings (loss) before interest,
   depreciation and amortization (1)                 198          (812)        (429)      (2,494)

Net loss per share (basic and diluted)          $  (0.02)     $  (0.24)     $ (0.10)     $ (0.49)


                                                                Quarter ended                  
                                               October 31,    January 31,   April 30,    July 31,
                                                  1996           1997         1997         1997
                                                  ----           ----         ----         ----

Net revenues                                    $  1,268       $ 2,934      $ 4,355      $ 4,905
Loss from continuing operations                     (299)         (657)        (316)        (461)
Net loss                                            (298)         (649)        (290)        (464)

Loss before interest,
   depreciation and amortization (1)                (247)         (440)        (123)        (133)

Net loss per share (basic and diluted)          $  (0.11)      $ (0.16)     $ (0.06)     $ (0.09)
</TABLE>

---------------
(1) Earnings (loss) before  interest,  depreciation and amortization is provided
    because  it is a  measure  commonly  used by  acquisition  companies.  It is
    presented to enhance an understanding of the Company's operating results and
    is not  intended  to  represent  cash  flow  or  results  of  operations  in
    accordance  with generally  accepted  accounting  principles for the periods
    indicated.

NOTE 16. PRO  FORMA  FINANCIAL   INFORMATION   (UNAUDITED  -  SEE   ACCOMPANYING
         ACCOUNTANTS' REPORT)

        The unaudited pro forma  financial  information set forth below reflects
the  historical  operations  of the clinics  acquired by the Company  during the
fiscal year ended July 31, 1998 (the  "Acquisitions"),  from August 1, 1997,  to
the  date  of  acquisition.  Such  financial  information  .is  not  necessarily
indicative  of the  Company's  combined  financial  position  or the  results of
operations  that  actually  would have  occurred  if the  Acquisitions  had been
consummated  on August 1, 1996,  for the fiscal  year ended July 31,  1997,  and
August 1, 1997,  for the fiscal  year ended July 31,  1998.  In  addition,  such
information is not intended to be a projection of results of operations that may
be  obtained  by the Company in the future.  The  unaudited  pro forma  combined
financial  information  should  be read in  conjunction  with  the  consolidated
financial statements and related notes thereto included elsewhere herein.

                                      -32-
<PAGE>
                   UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
                        FOR THE YEAR ENDED JULY 31, 1998


<TABLE>
                                                      ACQUIRED         PRO FORMA       SONUS CORP.
                                    SONUS CORP.       CLINICS(A)     ADJUSTMENTS(B)     COMBINED (C)
                                    -----------       ----------     --------------     ------------
                                                  (in thousands, except per share amounts)

<S>                                     <C>              <C>              <C>               <C>     
Net revenues                            $ 22,368         $ 10,467         $                 $ 32,835

Costs and Expenses:
  Cost of products sold                    7,712            5,051                             12,763
  Operational expenses                    18,193            4,826                             23,019
  Depreciation and
    amortization                           1,361              112               211            1,684
                                        --------         --------         ---------         --------
    Total costs and expenses              27,266            9,989               211           37,466
                                        --------         --------         ---------         --------
    Income (loss) from operations         (4,898)             478              (211)          (4,631)
Other income, net                            304               15                 -              319
Income (loss) before income taxes         (4,594)             493              (211)          (4,312)
Income tax expense                             -               23                 -               23
                                        --------         --------         ---------         --------
Net income (loss)                       $ (4,594)        $     470       $     (211)        $ (4,335)
                                        ========         =========       ==========         ======== 


Pro forma:
  Net loss per common share                                                                 $  (0.84)
                                                                                            ========

  Weighted average number
    of shares outstanding                                                                      5,167
                                                                                               =====
</TABLE>

                                      -33-
<PAGE>
                   UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
                        FOR THE YEAR ENDED JULY 31, 1997


<TABLE>
                                                      ACQUIRED         PRO FORMA       SONUS CORP.
                                    SONUS CORP.       CLINICS(A)     ADJUSTMENTS(B)     COMBINED (C)
                                    -----------       ----------     --------------     ------------
                                                  (in thousands, except per share amounts)

<S>                                     <C>               <C>             <C>               <C>     
Net revenues                            $ 13,462          $13,430         $                 $ 26,892

Costs and Expenses:
  Cost of products sold                    5,010            5,821                             10,831
  Operational expenses                     9,395            6,567                             15,962
  Depreciation and
    amortization                             790              188              328             1,306
                                        --------          -------         --------          --------
    Total costs and expenses              15,195           12,576              328            28,099
                                        --------          -------         --------          --------
    Income (loss) from operations         (1,733)             854             (328)           (1,207)
Other income, net                             32               21                -                53
Income (loss) before income taxes         (1,701)             875             (328)           (1,154)
Income tax expense                             -               19                -                19
                                        --------          -------         --------          --------
Net income (loss)                       $ (1,701)         $   856         $   (328)         $ (1,173)
                                        ========          =======         ========          ======== 


Pro forma:
  Net loss per common share                                                                 $  (0.29)
                                                                                            ========

  Weighted average number
    of shares outstanding                                                                      4,010
                                                                                            ========
</TABLE>


(a)     Reflects the historical  operations of the  Acquisitions  from August 1,
        1997, to the date of acquisition.

(b)     To record amortization of goodwill for the Acquisitions in the amount of
        $211,000 and  $328,000  for the fiscal  years ended July 31,  1998,  and
        1997,  respectively,  as if the  Acquisitions  had occurred on August 1,
        1997 and August 1, 1996, respectively.

(c)     The "Sonus Corp.  Combined"  column set forth in the unaudited pro forma
        statement  of  operations  (i) for the year ended July 31,  1998,  gives
        effect to the  Acquisitions  as if they had  occurred on August 1, 1997,
        and  (ii)  for the  year  ended  July  31,  1997,  gives  effect  to the
        Acquisitions as if they had occurred on August 1, 1996.


ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

Not applicable

                                      -34-
<PAGE>
                                    PART III

ITEM  9.  DIRECTORS,   EXECUTIVE  OFFICERS,   PROMOTERS,  AND  CONTROL  PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Information with respect to the directors and executive  officers of the Company
and  compliance  with Section  16(a) of the  Securities  Exchange Act of 1934 is
incorporated  herein  by  reference  to  the  Company's  definitive   Management
Information  Circular  and Proxy  Statement  dated  November  12,  1998  ("Proxy
Statement"),  under the headings "Share Ownership By Principal  Shareholders and
Management - Section 16(a) Beneficial  Ownership Reporting  Compliance" and " 3.
Election of Directors."

ITEM 10.  EXECUTIVE COMPENSATION

The  required  information  is  incorporated  herein by  reference  to the Proxy
Statement under the heading "Executive Compensation."

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  required  information  is  incorporated  herein by  reference  to the Proxy
Statement  under the heading  "Share  Ownership  By Principal  Shareholders  and
Management."

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  required  information  is  incorporated  herein by  reference  to the Proxy
Statement under the heading "Interests of Insiders in Material Transactions."

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits  are  listed in the  Exhibit  Index  beginning  on page 37 of this
report. Each management contract or compensatory plan or arrangement required to
be filed as an exhibit to this  report is marked with an asterisk in the Exhibit
Index.

(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during
the last quarter of the fiscal year ended July 31, 1998.

                                      -35-
<PAGE>
                                   SIGNATURES

In accordance  with Section 13 or 15(d) of the Securities  Exchange Act of 1934,
the  registrant  has  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

Date:  October 29, 1998                SONUS CORP.

                                        By /s/ Brandon M. Dawson
                                           Brandon M. Dawson
                                           President and Chief Executive Officer

In accordance  with the  Securities  Exchange Act of 1934,  this report has been
signed below by the  following  persons on behalf of the  registrant  and in the
capacities indicated as of October 29, 1998.

Signature                                    Title

PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:

/s/ Brandon M. Dawson
<TABLE>
<S>                                        <C>
Brandon M. Dawson                            President and Chief Executive Officer and Director


PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:

/s/ Edwin J. Kawasaki
Edwin J. Kawasaki                            Vice President-Finance and Chief Financial Officer
</TABLE>

OTHER DIRECTORS:

*JOEL ACKERMAN                               Director

*WILLIAM DeJONG                              Director

*GREGORY J. FRAZER, Ph.D.                    Director

*DOUGLAS F. GOOD                             Director

*HUGH T. HORNIBROOK                          Director

/s/ Edwin J. Kawasaki
Edwin J. Kawasaki, as attorney-in-fact

                                      -36-
<PAGE>
                                  EXHIBIT INDEX

Exhibit                Description of Exhibit
-------                ----------------------

3.1                    Articles of Incorporation of the Company. Incorporated by
                       reference to Exhibit 3.1 to  Post-Effective  Amendment No
                       1, filed March 5, 1998 (the "Amendment") to the Company's
                       Registration  Statement on Form SB-2 filed March 12, 1997
                       (File No. 333-23137) (the "SB-2").

3.2                    Bylaws  of the  Company.  Incorporated  by  reference  to
                       Exhibit 3.2 to the Amendment.

10.1                   Securities  Purchase  Agreement  between  the Company and
                       Warburg, Pincus Ventures, L.P. ("Warburg") dated November
                       21,  1997.  Incorporated  by reference to Exhibit 99.2 to
                       the Company's  current  report on Form 8-K dated November
                       25, 1997.

10.2                   Warrant  Agreement  between the Company and Warburg dated
                       December 24, 1997.  Incorporated  by reference to Exhibit
                       10.13 to the Amendment.

10.3                   Stock  Purchase and Sale  Agreement  dated as of February
                       28,  1997,  between  Gregory  J.  Frazer  and  Laurie Van
                       Duivenbode and SONUS-USA,  Inc., a Washington corporation
                       ("Sonus-USA"). Incorporated by reference to Exhibit 10.19
                       to the SB-2.

10.4                   Merger  Agreement dated as of October 1, 1996,  among the
                       Company, Hearing Care Associates-Glendale,  Inc., Hearing
                       Care   Associates-Glendora,   Inc.,   and  Hearing   Care
                       Associates-Northridge,   Inc.,  and  Gregory  J.  Frazer,
                       Carissa  Bennett,  and Jami  Tanihana").  Incorporated by
                       reference to Exhibit 10.20 to the SB-2.

10.5                   Asset  Purchase  Agreement  effective  as of October  31,
                       1996,  among the Company,  Sonus-USA  and Hearing  Health
                       Services, Inc., and Audio-Vestibular Testing Center, Inc.
                       (the  "Midwest  Division  Agreement").   Incorporated  by
                       reference to Exhibit 10.21 to the SB-2.

10.6                   Stock Purchase and Sale Agreement  dated as of January 9,
                       1997,  by and  between  Gregory  J.  Frazer  and  Stephen
                       Martinez  and  Sonus-USA.  Incorporated  by  reference to
                       Exhibit 10.24 to the SB-2.

10.7                   Form of  Convertible  Subordinated  Note  relating to the
                       Midwest Division Agreement.  Incorporated by reference to
                       Exhibit 10.25 to the SB-2.

10.8                   1993 Stock  Option  Plan.  Incorporated  by  reference to
                       Exhibit 10.26 to the SB-2.*

10.9                   Second  Amended and Restated Stock Award Plan (as amended
                       December 18, 1997).  Incorporated by reference to Exhibit
                       10.27 to the Amendment.*

10.10                  Employment  Agreement  dated  October  1,  1996,  between
                       Sonus-USA,   and  Gregory  J.  Frazer.   Incorporated  by
                       reference to Exhibit 10.28 to the SB-2.*

10.11                  Employment  Agreement dated as of November 1, 1996, among
                       the Company,  Sonus-USA, and Kathy Foltner.  Incorporated
                       by reference to Exhibit 10.29 to the SB-2.*

10.12                  Employment Agreement dated December 24, 1997, between the
                       Company and Brandon M. Dawson.  Incorporated by reference
                       to Exhibit 10.30 to the Amendment.*

10.13                  Employment Agreement dated December 24, 1997, between the
                       Company and Edwin J. Kawasaki.  Incorporated by reference
                       to Exhibit 10.31 to the Amendment.*

10.14                  Employment Agreement dated December 24, 1997, between the
                       Company  and  Randall  E.  Drullinger.   Incorporated  by
                       reference to Exhibit 10.32 to the Amendment.*

                                      -37-
<PAGE>
10.15                  Consulting  Agreement  effective  as of  January 1, 1997,
                       between the Company and Hugh T. Hornibrook.  Incorporated
                       by reference to Exhibit 10.33 to the SB-2.*

10.16                  Stock  Purchase and Sale  Agreement  dated as of March 6,
                       1997,  between  Gregory J.  Frazer,  Alfred S. Gaston and
                       Sonus-USA.  Incorporated by reference to Exhibit 10.34 to
                       the SB-2.

10.17                  Stock Purchase and Sale  Agreement  dated as of March 14,
                       1997, by and between Gregory J. Frazer, David N. Jankins,
                       and  Jami  Tanihana  and   Sonus-USA.   Incorporated   by
                       reference to Exhibit 10.35 to Amendment No. 1 to the SB-2
                       filed May 19, 1997.

10.18                  Stock  Purchase and Sale  Agreement  dated as of April 6,
                       1997, by and between Susan Diaz,  Gregory J. Frazer,  and
                       Jami Tanihana and Sonus-USA. Incorporated by reference to
                       Exhibit  10.36 to  Amendment  No. 1 to the SB-2 filed May
                       19, 1997.

10.19                  Promissory  Notes of Brandon M. Dawson dated May 8, 1997,
                       December  26, 1997,  March 19, 1998,  and April 24, 1998,
                       and related Pledge Agreement  between the Company and Mr.
                       Dawson,  dated May 1, 1998.  Incorporated by reference to
                       Exhibits  10.1,   10.2,  10.3,  10.4,  and  10.5  to  the
                       Company's Quarterly Report on Form 10-QSB for the quarter
                       ended April 30, 1998.*

10.20                  Amended and Restated  Promissory  Note of Gene K. Balzer,
                       Ph.D.,  dated  as of May 19,  1998,  and  related  Pledge
                       Agreement between the Company and Mr. Balzer, dated as of
                       May 19, 1997.*

10.21                  Stock  Purchase  Agreement  dated August 27, 1997, by and
                       between Carissa D. Bennett, Gregory J. Frazer, and Evelyn
                       L. Gong and Sonus-USA,  Inc. Incorporated by reference to
                       Exhibit  10.35 to the  Company's  Annual  Report  on Form
                       10-KSB for the fiscal year ended July 31, 1997.

10.22                  Stock  Purchase  Agreement  dated January 5, 1998, by and
                       between   Gregory  J.  Frazer,   Rhonda   Jesperson   and
                       Sonus-USA.  Incorporated by reference to Exhibit 10.41 to
                       the Amendment.

10.23                  Stock Purchase  Agreement dated February 12, 1998, by and
                       between  Gregory  Frazer,  Donald M. Welch and Sonus-USA.
                       Incorporated   by  reference  to  Exhibit  10.42  to  the
                       Amendment.

21                     The  Company's   subsidiaries  are  SONUS-USA,   Inc.,  a
                       Washington  corporation,  Sonus-Canada  Ltd.,  a  British
                       Columbia (Canada)  corporation,  and Hear PO Corp., a New
                       Mexico corporation.

23.1                   Consent of KPMG Peat Marwick LLP.

24                     Power of attorney of certain officers and directors.

27                     Financial Data Schedule.

----------------------------

  * Management contract or compensatory plan or arrangement.

                                      -38-